Markets in tune with weak global cues
Closing

Undoing most of the gains reaped yesterday, the benchmark Indian indices languished in the red for the entire session today. While the BSE Sensex closed lower by around 105 points (down 0.6%), the NSE Nifty lost around 35 points (down 0.7%). Weakness was also seen in the BSE Midcap index that closed 0.6% lower. However, the Smallcap index managed to buck the trend and closed 0.4% higher. The BSE auto and technology indices were the only gainers today with gains of 0.7% and 0.8% respectively.

Other Asian indices largely closed in the negative today while the European indices have also opened in the red. The rupee was trading at Rs 46.63 to the dollar at the time of writing.

Regulators globally have acknowledged the farsightedness of the RBI in terms of ensuring Indian banks preparedness to counter economic stresses. Other regulators in Asia had also tightened the norms to make provisions for higher NPAs after the Asian crisis. But the provisioning stance remained reactive to shifts in the business cycles. That is, they tended to be low ahead of crises and rise sharply as losses mount.

The Reserve Bank of India, in its 2QFY10 monetary review, had asked banks to ensure that they have 70% loan loss coverage ratio. While many banks have coverage close to the regulatory norm, many large lenders like SBI, ICICI Bank and Canara Bank had levels much below the prescribed norm. Banks had sought some flexibility in computing coverage ratio to include technical write-offs made by them for bad loans. While the same may be accommodated, we believe that Indian banks could stay globally competitive if they comply with better governance.

Telecom stocks that have had a good run on the bourses for the past few sessions seemed to be on the profit booking counter today. India's telecom tower industry which is set for a wave of consolidation has seen several small and medium sized firms opting for mergers or alliances to take on larger rivals and hasten rollouts in the face of rising demand. India's position as the fastest growing wireless market in the world has attracted several global players such as UK's Vodafone Plc, Japan's NTT DoCoMo and UAE's Emirates Telecommunications Corp (Etisalat). While the recent investor optimism about telecom stocks has been on the back of the impending 3G auctions, we believe that the new entrants could face stiff competition in terms of margin retention going forward.

After several Indian textile companies having forayed into multi-national joint ventures and unrelated businesses that burdened their balance sheets with heavy leverages, many are on a corrective mode these days. Home textile major Alok Industries is one of them. Two years after it entered the realty space by signing one of the largest land deals in the country, Alok Industries has decided to withdraw from this segment by 2012. It plans to come out of its realty projects by then and concentrate on the core textile business. The company wants to bring back the investment made in realty to partly pay its existing debt, which is around Rs 70 bn. It may be noted that Alok Infrastructure, the wholly-owned subsidiary of Alok Industries, had inked a deal worth Rs 11 bn with the Ashok Piramal group's Peninsula Land for the Dawn Mills at Lower Parel in Mumbai in 2007. However, the unsustainable debt burden has forced the company to reorganize its business. We believe that this move will help the company improve its growth and margins going forward. The stock of Alok Industries closed 6% higher today while its peer Welspun India closed marginally in the red.

Small caps buck the trend
02:30 pm

Amidst a choppy session of trade, the Indian indices managed to pare part of their early losses during the previous two hours of trade. Some buying activity witnessed in the telecom, IT, auto and realty sectors helped the benchmark indices to move up towards the dotted line. However, currently stocks from the metal, banking, oil & gas and FMCG sectors are weighing heavy on the indices.

The BSE-Sensex and the NSE-Nifty are in the red, shedding around 70 points and 21 points respectively. While the BSE-Midcap is trading lower by around 0.4%, BSE-Smallcap is trading marginally up by 0.5%. The rupee is trading weak at 46.71 to the dollar.

According to a leading business daily, Suzlon, the world’s third largest wind turbine maker, has won a 31.5 MW order from a Rajasthan state PSU for building 15 units of Suzlon’s S88 wind turbines. This is the seventh order and single largest of its kind that Suzlon has won from Rajasthan State Mines and Minerals (RSMML). With this RSMML aims to increase its total wind energy portfolio to 106 MW. This project once completed is expected to produce enough electricity to power as many as 6,000 households. RSMML which is a leading PSU in the renewable energy segment has continued its partnership with Suzlon, thereby strengthening the latter’s presence in India. Suzlon is currently trading in the negative.

As per a leading business daily, there appear to be more hiccups in the way of much awaited 3G spectrum auction. The auction might get delayed beyond the previous scheduled date of 14 January on account of uncertainty over available spectrum and also the number of slots to be put up for bidding. Currently the bone of contention is the 5 Mhz of 3G spectrum which is currently held by the Indian defence sector. According to the MOU, the spectrum will become available only after 3 years when the alternate defence network gets completed. However, the market conditions may be very different then. This situation has resulted in a dilemma about whether to auction that bandwidth or not.

It may be noted that about 20 Mhz of 3G spectrum will be available from the Defence department by September 2010, 5 Mhz of which will go to government telecom players like BSNL and MTNL and the rest 15 Mhz could be auctioned amongst private players in 3 blocks of 5 Mhz each. We believe that the sooner the issue gets resolved the better for the Indian telecom players like Bharti Airtel, Idea and RCom. These telecom players are betting big on 3G as the next wave of growth.  Stocks from the telecom segment are trading higher.

Markets fall deeper into the red
12:30 pm

Selling activity in index heavyweights has caused the benchmark indices to fall deeper into the negative territory after a brief tryst with yesterday's closing levels. While buying activity is being witnessed in stocks from the auto and IT sectors, stocks from metal and banking sectors have failed to elicit sufficient investor interest and are seeing declines currently.

The BSE Sensex is currently trading lower by around 95 points while the NSE Nifty lower by 30 points. Stocks from the midcap and smallcap space are a mixed bag with with the BSE MidCap index trading flat and the BSE SmallCap index trading higher by 0.6%. The rupee is trading at 46.71 to the US dollar.

Domestic pharma major Ranbaxy is planning to sell its 50% stake in its Japanese joint venture (JV) with Nihon Pharmaceutical Industry to its JV partner Nippon Chemiphar. This stake was bought by the company prior to the Japanese Daiichi Sankyo picking up a majority stake of 64% in Ranbaxy. Since Ranbaxy itself now belongs to a Japanese parent, it would make little sense for the company to have a separate JV in Japan to develop its generic business. The company currently supplies about seven drugs to the JV which will be terminated gradually to enable a smooth transition. This move is a precursor to Ranbaxy and Daiichi Sankyo selling their generic drugs in the lucrative Japanese generics market on their own. The stock of Ranbaxy is trading higher currently.

Banking majors ICICI Bank and Kotak Mahindra Bank have upped the ante as far as being competitive is concerned. They have intensified the interest rate war amongst banks in the home loan market by slashing their fixed-cum-floating rate schemes rates. ICICI Bank has launched a home loan scheme under which it will offer loans at an interest rate of 8.25% fixed for the first two years. The floating rates will apply after the first two year. These rates will be applicable to loans sanctioned between December 2009 and January 2010. Kotak Mahindra Bank too has announced its new home loan scheme wherein it will offer 8.49% fixed rate on home loans for 30 months from the date of the payout of the loan. This may affect the margins of these banks in the short term, but since home loans are typical long term in nature, it will give the banks enough time to work on margins by lowering their cost of deposits going forward. Further, it is a move by them to increase the proportion of secured loans on their books in contrast to unsecured loans like personal loans that are more risky, especially in uncertain times like these. While banking stocks are trading mixed, both Kotak Mahindra Bank and ICICI Bank are trading lower currently.

Weak Asia pulls India down
10:30 am

The Indian markets have started on a weak note as the benchmark indices opened below the breakeven mark on the back of weak global cues. However, they have marched upwards towards the dotted line since then. Asia is currently trading in the red with China (down 1.6%) leading the pack of losers. The US markets closed lower by 1% yesterday.

Currently, in India, heavyweights from the BSE-Sensex are trading in the red with metal and banking stocks leading the pack of losers. The BSE-Sensex is trading lower by 26 points, while the NSE-Nifty is down by 12 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 0.2% and 0.3% respectively. The rupee is trading at 46.83 to the US dollar.

Energy stocks have opened the day on a mixed note. Gainers here include HPCL and BPCL, while Cairn India is in the red. As per a leading business daily, exploration and production major ONGC has signed an agreement with Russian conglomerate Sistema to jointly acquire and develop oil & gas blocks in Russia and the CIS. Sistema is a new entrant in the hydrocarbon space but knows its way around the local bureaucracy, being the largest public corporation in Russia. ONGC already engages with Russia's state-run Rosneft and Gazprom. It also has assets in Western Siberia after the acquisition of Imperial Energy. It may be noted that India and China are trying to secure oil and gas assets worldwide in order to address their burgeoning needs. Hence, we find India putting its diplomatic weight squarely behind state owned oil companies like ONGC and Indian Oil in their overseas forays.

Auto ancillaries have opened the day on a strong note. Gainers here include Mahindra Forgings and FAG Bearings. As per a leading business daily, auto major M&M plans to consolidate its auto components businesses into a single entity. This would consolidate firms such as Mahindra Forgings, Mahindra Composites, Mahindra Gears, Mahindra Castings and Mahindra Ugine under the Systech brand. The process is expected to take over two years. M&M is likely to hold about 60% of the new entity. In our view this is a positive development as it will cut costs for the company by reducing the number of vendors and tightening its marketing effort. It may be noted that auto component companies were among the worst hit during the liquidity crisis.

Rising food prices to propel yields
Pre-Open

All is not hunky dory for the Indian economy. Yes, that the Indian GDP has grown by 7.9% in the September quarter is certainly something to cheer about. But the looming threat of inflation persists. What is worrying really is the rising food prices which was reflected in the wholesale food-price index that climbed to an 11-month high in November.

As a result, the government yesterday sought an approval to spend an extra US$ 6.6 bn, partly to subsidize food and fertilizers so as to douse rising inflation. Infact, plans on the anvil include spending Rs 34.6 bn on subsidizing food prices for the poor and Rs 30 bn for subsidizing fertilizers. The interesting thing to note is that the government's fiscal deficit had soared to 6.2% in FY09 and is expected to remain high at around 6.8% in FY10. With the added borrowings that the government is going in for, it appears that the deficit is set to exceed the estimate for this year. While the Finance Minister Pranab Mukherjee opines that government borrowings will be within the target estimated, investors are not likely to be enthused. And so, bond yields are also expected to soar to 8% putting added pressure on government finances.

It is obvious that the only other way for the government to contain the deficit is by increasing revenues. Its proposed plan to auction third-generation telecommunications network that allows high-speed Indian connections is one way of doing so. As reported on Bloomberg, this is because the plan will bring in Rs 250 bn to the government coffers. But so often in the past, the problem for the government has always been effective execution of plans and it remains to be seen whether this will witness a sea of change this time around.

Japan fails to deliver yet again
It has been called the country with the 'lost decade' and the recent GDP figures released for the third quarter of 2009 do not paint a rosy picture either. Yes, we are talking about Japan. As reported on Bloomberg, Japan's GDP rose at an annual rate of 1.3% lower than what had been estimated by experts and economists alike. Japan has yet to shake off the crippling effects of the global financial crisis and the data shows that Japanese companies are cutting down on capex for building plant and machinery as they want to protect earnings. As a result there are concerns that the economy is already under threat of deflation. To make matters worse, the country which is dependent on exports is already reeling by the impact of a rising yen. While consumer spending which accounts for 60% of the economy rose by 0.9%, exports rose by a meager 6.5%.

Since the Japanese economy is dependent on how its developed peers of the US and Europe are doing, it seems unlikely that there will be much headway in terms of growth unless the US and Europe comes out from the slump. It is expected that the scenario is likely to be much better in 2010. But whether that actually turns out to be the case is anybody's guess.