Indian indices remain volatile

Indian equity markets had a rather volatile trading session today. While the indices began the day's proceedings on a positive note, subsequent trading hours saw them barely stay afloat. Selling activity intensified in the afternoon session pushing the indices deeper into the red. There was no respite in the final trading hours either and the indices closed well below the dotted line. While the BSE-Sensex today closed lower by 209 points, the NSE-Nifty closed lower by 61 points. The BSE Mid Cap and the BSE Small Cap were not spared either and lost around 1% each. Losses 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 red. The rupee was trading at Rs 63.75 to the dollar at the time of writing.

Aluminium stocks closed mixed today. While Nalco and Sterlite Industries found favour, Hindalco closed in the red. As per a leading business daily, aluminium major, National Aluminium Company (Nalco) announced results for the second quarter ended September 2013. Revenues grew by 7.8% YoY during the quarter primarily led by the chemicals business which grew by a robust 49% YoY. On the other hand, revenues from the aluminium and electricity segments were down 22% YoY and 19% YoY respectively. The company cut down its expenditure, especially fuel and power costs (down 32% YoY). Thus, for the quarter, the company reported net profits of Rs 1.8 bn as compared to a profit of Rs 47 m in 2QFY13.

The Indian economy may have slowed down considerably at present, but Mr Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission, is of the view that the economy will get back on the targeted growth trajectory of 8% after two years. For the 12th plan period (2012-17), the government had earlier set a target of 8% annual average growth rate. In the first year, growth was rather tepid at 5%, a decade-low rate. As a result, according to Ahluwalia, the average economic growth rate in the 12th Plan period will be lower than 8%. While FY14 is most likely to remain subdued, recovery is expected to take place FY15 onwards. How the growth will pan out during the 12th Plan period all depends on how the government chooses to implement reforms and the stated objectives of the Plan.

Small and mid cap in favour
01:30 pm

Indian markets continued to trade weak during the post noon trading session. Sectoral indices are trading mixed. Stocks from metal and auto are among leading gainers, while stocks from realty and FMCG are among leading losers.

BSE-Sensex is down by 54 points and NSE-Nifty is trading down by 12 points. While BSE Mid Cap is trading up by 0.37%, BSE Small Cap index is trading up by 0.24%. The rupee is trading at 63.51 to the US dollar.

Most of the MNC pharma stocks are trading in green, with Pfizer India and Abbott India being the leading gainers. Pfizer India has announced its September quarter results. Net sales grew by 8.6% YoY for the quarter. After hiving off the animal business, large part of company's revenues come from core pharmaceuticals segment. On the operating front, EBITDA grew by 21.5% YoY, leading an improvement in EBITDA margins of 1.7%. The improvement was also on back growth in the other operating income. On the bottom line, PAT grew by 33.1%, largely helped by increase in other income and decline in interest costs. Pfizer is trading up by 5.1%

Majority of the Automobile stocks are trading in the red with Tata Motors and Ashok Leyland being the major losers. As per a leading financial daily, the society of Indian automobile manufacturers (SIAM)has reported automobile sales data. Total sales across various categories were up by 12.5% YOY for the month of October. In this, the car sales dropped by 3.9% YoY while the motorcycle sales have increased by 18.1% YoY for the said period. The truck and bus sales were down by 19.8% YoY during the month. Reportedly, the industry body SIAM now expects that the current financial year will witness negative growth in car sales, considering the declining trend so far.

Indian markets slip into the red
11:30 am

After opening in the positive, Indian Indices have slipped below the dotted line in the morning session due to profit booking at higher levels. Selling pressure has been the highest in Auto and Metal stocks.

The BSE Sensex is down 65 points and the NSE-Nifty is trading down 20 points. The BSE Mid Cap index is trading up 0.4% and the BSE Small Cap index is trading up 0.1%. The Rupee is trading at 63.57 to the US Dollar.

Most Mining stocks are trading in the negative today. Sesa Sterlite and Coal India are among the stocks leading the losses. According to a leading business daily, the Supreme Court of India has given the go ahead to the government of Goa to auction 11.46 million tonnes (MT) of iron ore. This would be done via an e-auction under the supervision of the court. This would be similar to an earlier auction in state of Karnataka. The auction would be of iron ore that has already been mined of a value of approximately Rs 7.6 bn. The e-auction will follow a competitive bidding process to ensure fairness and transparency. A 6-member court appointed expert committee will oversee the process. The apex court had stopped all fresh mining operations in the state in September 2012 until it decided on the legality of the mines from which the ore was being extracted. It has not placed any restrictions on the export of the ore that would be won by the successful bidders.

PSU Banking stocks are trading mixed today. Oriental Bank of Commerce and UCO Bank are leading the gainers, while Corporation Bank and Central Bank are leading the losers. Corporation Bank reported disappointing results for the second quarter of FY14. The bank posted a 17% YoY growth in total income. Its interest income rose by 18.5% YoY. However, it had to set aside around Rs 7 bn as provision for bad loans as there was a sharp increase in net non-performing assets. There was also a depreciation of Rs 2.5 bn on its investments. Moreover, high employee cost and other expenses led to a 21% YoY increase in its total expenses. This resulted in about 96% YoY decline in net profits to just Rs 150 m. Corporation Bank is down 6.7% today.

Indian stock markets open in the green
09:30 am

The major Asian stock markets have opened the day on a mixed note with Hong Kong (down 0.7%) and Malaysia (down 0.3%) leading the losses. However, the stock markets in Japan (up 1.6%) and South Korea (up 1.0%) were leading the gains. The Indian stock markets have opened the day on a positive note. Barring auto and metal stocks, all sectoral indices have opened in the green with stocks in the realty and consumer durables space leading the gains.

The Sensex today is up by around 68 points (0.3%), while the NSE-Nifty is up by around 30 points (0.5%). The midcap and smallcap stocks have also opened in the green with the BSE Mid Cap index and BSE Small Cap index up by around 0.6% and 0.4% respectively. The rupee is trading at 63.44 to the US Dollar.

Steel stocks have opened the day on a mixed note with Steel Authority of India Ltd (SAIL) and Tayo Rolls Ltd leading the losses. However, JSW Steel Ltd and JSW Ispat Ltd were leading the pack of gainers. SAIL has announced results for the second quarter of the financial year 2013-14 (2QFY14). The net sales for the quarter were up by 7% on a year on year (YoY) basis. The company reported about 14 % YoY growth in saleable steel during the quarter. However, the average sales realization during the quarter declined by 8% YoY. The operating profits during the quarter were down by around 22% YoY. The operating profit margins for the quarter stood at 6.5%, down by around 240 basis points (2.4%) YoY. As per the management, the price of imported coal during the quarter moderated to US$ 135 per tonne, as compared to US$ 220 per tonne in 2QFY13. The net profit for the quarter jumped more than two fold on a year on year basis. However, this was mainly due to one time gain of around Rs 10.6 bn from the global mining major Vale towards damages due to non-supply of full quantity of contracted hard coking coal. Excluding the one time gain, the bottomline declined by around 77% YoY.

Food & Tobacco stocks have opened the day on a mixed note with Golden Tobacco and Wadala Commodities Ltd leading the losses. However, Britannia Ltd and Sterling Biotech Ltd were leading the gains. The FMCG major Britannia Industries has announced results for the second quarter of the financial year 2013-14 (2QFY14). The net sales during the quarter were up by 13% on a year on year (YoY) basis. The management stated that more than 50% of the growth in sales was on account of the price hikes taken earlier during the year. The rest of the growth came from increased sales of higher margin products and slight rise in volumes. The overall expenses during the quarter increased by around 8.8% YoY. An increase in the sales and improvement in the margins led to a 66% YoY jump in the net profit for the quarter. This was despite a slowdown in the demand in the last couple of months. As per the management, the growth in the net profits was the result of better cost management and revenue management. Besides, it was supported by a moderation in the increase in the commodity prices as compared to last year.

Why are Indian airline companies doomed?

Most Indian airline companies are finding it difficult to generate profits. Regulatory hurdles, high cost of fuel, depreciating rupee and declining occupancy amidst slowdown in business environment has made their life difficult. The situation is so grim that auditors of three listed airline companies namely Spice Jet, Kingfisher Airlines and Jet Airways have expressed reservations over their going concern status. In other words, these companies are well on death bed and can face bankruptcy if their financial position does not improve soon.

The trouble brewing at Kingfisher Airlines is in public. The airline is grounded. It has loads of debt which has been recalled by banks. Net-worth of the company is also in the negative. Continuing losses has wiped off the reserves on balance sheet. It's accumulated losses till date stood at Rs 160 bn. Thus, it is pretty evident that the company is on the verge of bankruptcy.

Similar is the case with Jet Airways, Spice Jet and Air India. The Jet-Etihad deal is in a limbo since long due to regulatory issues. And the company is struggling to generate sufficient cash and profits to operate the business. The accumulated losses at Spice jet have wiped off the entire net-worth of the company. Air India is also on a similar page and has been making losses since the last 5-6 years.

Thus, it can be seen that the entire airline industry is in a mess. Most carriers are bleeding. Now, in an industry if one or two operators are bleeding then it is understood. This could well be the case of inefficiency in managing the day to day operations. But here the entire industry is bleeding. And the entire industry cannot be inefficient! There is definitely something more to it. Let us understand what it is.

In the early days, Air India dominated the Indian skies. However, once the sector was liberated, private competition started coming in. Thus, competition intensified. This led to a problem of over capacity. Plain simple economics, isn't it? However, when an industry is characterized by competition from new entrants and there is over capacity, weaker players exit as it becomes unviable for them to continue.

But most Indian airline operators have deep pockets. Hence, they continued their existence. Take the case of Air India. Being government owned, it got bailed out every time it needed money. Also, Vijay Mallya, owner of Kingfisher Airlines has deep pockets. Thus, these companies have remained in existence for far too long. Stronger finance has kept them afloat. Also, strong financial backing means they can easily resort to under cutting to gain market share. This impacts other players in the industry as they need to cut pricing too in order to not lose their market share to others.

Another factor responsible for losses in the airline industry is the quantum of levy on aviation turbine fuel (ATF). It may be noted that ATF is way expensive in India than compared to other countries because of a host of taxes levied on it. With fuel prices rising and competition intensifying, it becomes very difficult for an airline operator to cough up profits. Yields are tight. Hence, lower occupancy results in losses.

The airline industry is in a complete mess. The only way it can get back on its feet is when the loss making entities are forced to exit instead of getting bailed out. This will ensure rational pricing and genuine competition.