Profit booking takes toll

Heavy selling pressure took its toll on the index levels during the closing hours of trade. As a consequence, the benchmark indices plunged deep into the red and closed the day significantly lower. While the Sensex lost in the region of 230 points (down 1%), NSE Nifty erased around 70 points from yesterday's closing (down 1%). BSE Midcap and small cap indices weren't spared either as they closed lower by 0.7% and 0.9% respectively. More than 3 stocks declined for every one that gained on the Sensex today.

Among Asian indices, while most of them closed the day in the red, the European indices have opened largely on a positive note. The rupee was seen trading at Rs 44.3 to the dollar at the time of writing.

Today's selling seemed a consequence of some profit booking on the part of FIIs. They have been buying into the Indian growth story for quite some time now and with the markets trading close to its all time highs, the thought of booking profits and taking some money off the table seemed to have entered their minds. With no significant negative news coming out from both the global as well as Indian markets, we believe today's profit booking notwithstanding, FIIs will continue to flock to Indian stocks in the immediate term.

Real estate stocks closed mostly in the red today with companies like Unitech and Sobha Developers amongst the major losers. It has been a very strange year so far for the real estate companies. While real estate prices have gone up in most major cities across India, the sector stocks have not exactly been on fire. Infact, as per a leading daily, the realty index last touched its 52 week high in October 2009. It has remained largely an underperformer since then despite Sensex and other sectoral indices reaching new highs. But not anymore if few analysts are to be believed. They are of the opinion that the good time for sector stocks has indeed arrived as high real estate prices start reflecting in their numbers as well. However, we would advise investors to exercise caution in view of bubble like conditions in few major cities and the heavily leveraged balance sheets of the larger players.

Steel stocks closed weak today with Tata Steel and Ispat Ind. amongst the leading losers. The weakness seemed a result of news in a leading daily that cost pressures in terms of raw materials is expected to negatively impact EBITDA per tonne for steel companies during the September quarter. It should be noted that prices of key raw materials such as iron ore and coking coal had increased sharply during the first quarter of the current fiscal and its full impact would be visible in the current quarter, thus impacting margins. While steel companies did take price hike to counter the trend, its effect would be modest at best. Moreover, volume growth was also not up to the mark as lower demand due to monsoons and company specific events hurt the growth of the metals industry.

Focus shifts to midcaps
01:30 pm

Indian indices recovered their opening losses as buying interest returned in heavy weights during the previous two hours of trade. Stocks from the pharma and consumer durable space are trading firm while stocks from the IT and banking space are trading weak.

Both the BSE-Sensex and the NSE-Nifty are trading marginally above the dotted line. BSE-Midcap is up by 1.0% while BSE-Smallcap index is trading 0.9% above yesterday's closing. The rupee is trading at 44.20 to the US dollar.

Pharma stocks are trading mixed with Biocon and Ranbaxy trading firm while Pfizer and Merck Limited are trading weak. Pfizer released its 3QCY10 results yesterday. The company's topline grew by 12.7% YoY for the quarter. This was due to a strong growth of 14.3% in the company's pharmaceutical business as well as a growth of 118% YoY in clinical development operations. However, the company's animal health business increased by 9.3% YoY, capping the company's topline growth. Operating (EBITDA) margins fell from 24.3% in 3QCY09 to 22.1% during the quarter. This is due to a sharp rise of 55% YoY in employee costs as a result of gratuity provision made during the quarter. Other expenditure also increased sharply by 28% YoY putting further pressure on margins. On the other hand, the company got some relief as raw material costs fell by 7% YoY.

FMCG companies are trading firm led by Dabur and Marico. As per a leading financial daily, laundry detergent makers who have been struggling due to rising raw material prices are facing another challenge. The government plans to impose anti-dumping duty on soda ash. Soda ash forms 30% of the total product formulation costs of low price detergents and 15% for premium detergents. It may be noted that at present soda ash attracts a safeguard duty on imports from China at 16%. Since laundry detergent makers operate on thin margins, a price hike of 10-12% is likely if the anti-dumping duty is imposed. This is likely to affect companies like HUL, P&G, Nirma etc.

IT and banking stocks lose favour
11:30 am

After starting today’s session on a positive note, Indian indices have slumped into the red. Other key Asian markets are also trading weak with Hang Seng, Nikkei and Singapore trading weak. Currently, heavyweights in the Sensex are trading weak with stocks from the IT and banking space losing favour while and consumer durables and healthcare stocks found some buying interest.

Currently, the BSE-Sensex is trading down by around 56 points, while the NSE-Nifty is down by about 9 points. Some buying interest is being witnessed amongst mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading up by 0.5% and 0.6% respectively. The rupee is trading at 44.33 to the US dollar.

Banking stocks are trading weak with Oriental Bank and Canara Bank leading the losses. SBI plans to scale up its operations in rural India. This is for the purpose of increasing financial inclusion in the country. The bank plans to increase its rural lending book by 25% and its deposit base by about 28%. At the end of FY10 the bank had lent around Rs 1.4 trillion in rural centers and it plans to increase its loan book by Rs 364.7 bn by the end of FY11. The bank's deposit base in rural areas at the end of March 2010 stood at Rs 2.5 trillion and it plans to add about Rs 732.8 bn to its deposit base.

The bank is looking at augmenting its rural outreach though its branch network, use of technology and various business correspondents (BCs). SBI plans to add around 1,500 branches in rural and semi urban areas in the next three years. At present, the bank has 12,647 BCs. It plans to add another 12,000 BCs by the end of FY11.

IT stocks are trading firm led by Mphasis Ltd and NIIT. As a part of an initiative to compete better against MNC rivals, HCL technologies plans to have new ideas such as cloud computing become major revenue contributors over the next five years. The company has formed a new unit called ‘ecosystem and business incubation organization’ to identify new business ideas over the next few years. Right now the company has identified five new ideas which have potential to become US$ 100 m businesses in three years, and almost US$ 300 m over the next five years. The company is making organizational changes to ensure that it prioritizes on new ideas to succeed against rivals. Cloud computing is one of such ideas.

It should be noted that in light of intense competition, Indian IT vendors are looking for new avenues like cloud computing as next big opportunity. Since cloud computing model requires customers to pay subscription fee it ensures a more predictable revenue stream benefitting companies during downturn.

IT stocks push markets lower
09:30 am

The Indian markets have started today's session on a negative note. The benchmark indices opened above the breakeven mark but have slipped into the negative territory. Other key Asian markets are in the red with Singapore (down 0.5%) leading the pack of losers. The US markets ended higher by 0.2% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading weak with software majors facing the brunt of selling activity. The BSE-Sensex is trading lower by around 28 points, while the NSE-Nifty is trading down by around 4 points. However, buying interest is being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.4% and 0.5% respectively. The rupee is trading at 44.39 to the US dollar.

Auto stocks have opened the day on a strong note. Gainers here include SAIL and Tata Sponge. As per a leading business daily, the government has decided to cut the size of SAIL's board from 24 to 18 members. Two new board positions, that of director raw materials and logistics and director projects, will also be created. Given the steel major's expansion plans and the number of new projects it is taking up, raw materials and projects need to be supervised on a continuous basis. The managing directors of SAIL's four integrated steel plants at Durgapur, Rourkela, Bhilai and Bokaro will no longer be part of the board. The changes are part of a restructuring exercise that has to be completed before the company's follow-on public offer (FPO) in December. A smaller board of directors will provide flexiblity in functioning and will also be easier to operate.

Pharma stocks have opened the day on a strong note. Gainers here include Dr. Reddy's and Indoco Remedies. As per a leading business daily, Glenmark Pharma has received an exclusive license to the entire intellectual property of Italian biotechnology firm, Lay Line Genomics (LLG) for a process for treating chronic pain and inflammation. The license is for the process involving 'TrkA receptors', which is part of a master control system in the spread of inflammation and pain. The company plans to develop this novel biological entity by its biologics R&D centre in Switzerland. The amount paid to LLG for the license has not been disclosed.

Is it stimulus all over again?

The truth is getting difficult to ignore. It seems to be hitting us in the face and hitting hard. Growth in the developed markets is fading. Stimuli measures that were unleashed a couple of years back are showing signs of wearing off. Thus, it is back to the drawing boards for quite a few central banks around the world.

Amidst all this, it looks like this time it is not the US that has fired the first salvo. The honours have gone to its Japanese counterpart, The Bank of Japan. Recently, it dropped its interest rate to 'virtually zero'. As per Moneynews, it cut its overnight call rate target from 0.1% and established a 5 trillion yen fund to buy government bonds and other assets.

Japan's move is not entirely unexpected. The Japanese Yen moved to a 15 year high last month and this was obviously hurting its exports, its most important source of economic growth. Therefore, it had to do something to stem the Yen's appreciation and it did indeed move swiftly.

However, it is not Japan alone that is trying to boost its exports. Even the US and the Euro Zone desperately want to do the same. Thus, the move by Japan could easily snowball into a fresh round of monetary easing across the globe.

As Warren Buffett says, in economics you can never really do one thing. There are always other effects that come out of it. Thus, this second round of monetary easing could also have its effects. In the form of higher inflation.

However, inflation is not a problem right now. It is deflation, its exact opposite that is the key concern for most investors. They fear that if deflation takes hold then the economy would enter a downward spiral, leading to some very nasty depression. And they certainly do not want such a scenario to present itself.

However, if deflation is a threat, what about hyperinflation? Will not the extensive money printing that is happening right now lead to hyperinflation in the future and destroy the purchasing power of most currencies across the globe.

It is not that the economists are not aware of the threat of hyperinflation. But they are of the opinion that they can have their cake and eat it too. In other words, all they want is a little bit of inflation and not hyperinflation. And they think they will be able to induce monetary tightening just at the right time.

However, this is easier said than done. The real economy is an extremely complex being. Expecting it to behave exactly the way one wants it to is a recipe for disaster. There is every chance that a small inflation snowballs into hyperinflation before the central banks could do anything. And it is this scenario that they should also take into account before they start embarking on another round of quantitative easing.

As for us, it always helps to have a little bit of gold handy.