IIP slowdown spooks markets

The Index of Industrial Production (IIP) declined 5.2% in October. This was first time since June 2009 that IIP fell into the red zone. Manufacturing, mining and capital goods sectors led to the fall in the index. The Indian stock market reacted badly to this news and as a consequence sunk deep into the red. Sell off in heavyweights across indices led the markets to close well below the dotted line. While the BSE-Sensex closed lower by around 343 points (down 2.1%), the NSE-Nifty closed lower by around 102 points (down 2.1%). The smaller indices albeit still at a loss, fared slightly better. The BSE Mid Cap and BSE Small Cap also lost around 0.9% each. Stocks from the engineering and auto sectors were the top losers. All indices closed the day in the red.

As regards global markets, Asian indices closed mixed today while the European indices have opened in the red. The rupee was trading at Rs 52.61 to the dollar at the time of writing.

The UID project started off with great promise with the noble mission of giving each and every one of India's citizens a unique ID. It is estimated to offer IT companies a Rs 150 bn - 200 bn opportunity. This includes building an entire project ecosystem, biometrics, databases, smartcards, storage, system integration etc. However the parliament committee has stated that the project might prove to be too expensive and may also lead to some duplicity of data. Thus, it is unclear whether the project will be shelved or watered down. Wipro has won some contracts for supplying hardware and software and MindTree has won a contract for application software development, maintenance and support. Tata Consultancy Services (TCS), Satyam and HCL Infosystems have also won other contracts. Tech companies may thus see some delay in government spends and project execution.

FMCG companies are adopting various measures to help protect their margins as the slowing economy, reducing pricing power and sticky inflation continue to take its toll on consumers. Various methods which these companies are undertaking include input substitution, managing overheads and rationalising personnel. Firms are also looking at local sourcing of inputs on account of the high rupee-dollar exchange rate currently. Recently Britannia Industries asked 42 employees to leave the firm citing underperformance as a reason for the layoffs. During a slowdown additional pressure is heaped on employees to meet their targets and for firms to maintain their margins.

Indian indices slip further in the red
01:30 pm

Indian stock markets indices lost further ground in the last two hours of trade on the back of persistent selling across heavyweights. All the sectoral indices are trading in the negative with auto and capital goods stocks leading the pack of losers.

The BSE-Sensex is trading down 275 points and NSE-Nifty is trading weak by 77 points. Both BSE Mid Cap and BSE Small Cap indices are trading down 0.9%. The rupee is trading at 52.49 to the US dollar.

Energy stocks are trading in the negative today led by Essar Oil Ltd and Reliance Industries. As per a leading financial daily, Bharat Petroleum Corporation Ltd. (BPCL) aims to diversify into petrochemicals by building a niche specialty chemical project at Kochi. The project is estimated to cost Rs 50 bn-60 bn and the company plans to rope in a multinational partner for the same. Besides, the company has plans to expand the capacity of Kochi refinery from 9.5 million tonnes per annum (MTPA) to 15 MTPA. The total expenditure for both the projects is estimated at Rs 180 bn to Rs 200 bn over a period of five years. The stock was trading in the red.

As per a leading financial daily, the industrial output, that had been growing since July 2009, has fallen for the first time in October 2011. The Index of Industrial production (IIP) for the month contracted by 5.1%, pulled down by a steep 25.5% slump in the capital goods output. Although the broad indices have been trading in the negative, the capital goods sector was the biggest loser, down 2.6%. As per Larsen and Toubro's management, the slowdown in IIP and GDP growth was expected and the growth in capital goods space could be slow for the next two years. The news has further reinforced the fears of a slowdown in the economy.

Indian stock markets shed gains
11:30 am

Indian stock markets indices shed early morning gains and traded in the negative during the previous two hours of trade. Metal and power stocks are the top losers. However, IT and FMCG stocks are trading in the green.

The BSE-Sensex is trading down by 79 points and NSE-Nifty is trading weak by 28 points. BSE Mid Cap and BSE Small Cap indices are trading down by 0.4% and 0.2% respectively. The rupee is trading at 52.39 to the US dollar.

Auto stocks are trading in the red led by Eicher Motors and Force Motors. As per a leading financial daily, Mahindra and Mahindra (M&M) is planning to set up an assembly plant in Southeast Asia. The new plant is expected to start functioning in the next couple of years. The company is considering Thailand, Malaysia and Indonesia as prospective locations. As per the management, this is very much in line with their aim of becoming a global player by expanding operations globally. M&M already has an automotive assembly plant in Brazil and Egypt. The Asian Free Trade Agreement that would call for low and falling duty regimes among member countries has resulted in opportunities for the auto company.

Energy stocks are trading weak today led by Gujarat State Petronet and Gujarat Gas. As per a leading financial daily, Gas Authority of India Ltd. (GAIL) has signed a deal with Sabine Pass Liquefaction. The deal will be to import liquefied natural gas from the US from 2017 onwards. This will ensure steady long term supplies at prices that are linked to the Henry Hub (US benchmark). The deal is for a period of 20 years but can be extended to another 10 years with mutual agreement. As per the currently benchmark rates, gas would effectively cost US$ 10-11 per unit in India. This is US$ 5-6 cheaper than the gas obtained through LNG contract with an Australian firm.

Realty lifts Indian stocks markets
09:30 am

Asian stock markets have opened the day on a mixed note. Stock market in Hong Kong (up 1.3%), Indonesia (up 1%) and Singapore (up 0.7%) is in the green while Malaysia (down 0.8%) and China (down 0.4%) is in the red. The Indian stock market have opened the day on a firm note. Stocks in the Realty and Metal space are leading the gains.

The BSE-Sensex is trading up by 84 points (0.5%) and the NSE-Nifty is up by around 20 points (0.4%). BSE Midcap and BSE Small cap stocks have opened on a firm note, with the BSE Mid Cap indices up by 0.5% and BSE Small Cap up by 0.6%. The rupee is trading at 52.14 to the US dollar.

Pharma stocks have opened the day on a weak note with Lupin and Ranbaxy leading the losses. Indian pharmaceutical player, Lupin is expecting 80% jump in its revenues to from US$ 165 m to $300 m from the Japan market over next two years. This comes after Lupin further strengthened its position on back of its enhanced presence after it acquired I'rom Pharmaceutical from I'rom Holdings Co Ltd. Apart from US and India, Japan is the priority market for Lupin. Currently, Lupin owns 2 companies in Japan-Kyowa and I'rom Pharmaceuticals

Auto Stocks have opened the day on a weak note with Maruti and Mahindra & Mahindra in the red. Maruti Suzuki's car, Swift, may see expansion to 3 body styles instead of 2 currently. The company is trying to maximize returns from its existing platform by adjusting itself with the current excise duty structure. The new version will most likely be named Swift 3.99 and will be Maruti's cheapest sedan. This will be sold along with existing Swift Dzire and will be offered at a lower price. The discount will be in the range of 50,000 when compared to Swift Dzire. The launch of this 4 metre Sedan will be done in February. Currently trial productions are in place.

Does this Euro deal promise anything?

Let us start the discussion with the most important aspect of the new endeavour to save the Eurozone. In the new deal, we do not have all 27 members of the European Union. All 17 members that use the Euro and six other members Denmark, Latvia, Lithuania, Poland, Romania and Bulgaria would collectively pursue a fiscal and economic union via a new treaty outside the EU. These 23 members are termed as 'euro plus". One of the most important members, the United Kingdom (UK) is not participating in this treaty. The British Prime Minister, Mr David Cameron, vetoed a change in the existing EU treaties and left other big leaders in the EU frustrated as they tried hard to convince Mr Cameron to support the new treaty.

Despite Britain's stubborn attitude in the battle against the crippling debt crisis, euro plus went ahead and made a new treaty. This treaty has some good signals for the global economy. For starters, these countries have accepted that excessive debt is the root cause of the problem. And, they have decided to pursue a tougher budget discipline regime with automatic sanctions for deficit sinners in the single currency area. All 23 countries are committing to keep their deficits below 0.5% of GDP. This is a definitely a welcome move towards an attempt to overcome the growing debt crisis. According to this new treaty, all countries would be declaring in advance how much debt they plan to take on through bond sales.

They have also decided to give Euro 200 bn to the International Monetary Fund (IMF) to ensure that the IMF has adequate resources to deal with the crisis. Further, the European Stability Mechanism (ESM), the bailout fund, would take over from the existing rescue fund, the European Financial Stability Facility (EFSF).

All sounds good. However, are these steps enough to save the European Union?

ESM seems set to be capped at Euro 500 bn. This is definitely huge. But, Italy's total debt alone is roughly around Euro 2 trillion. Here, we are not even counting Spain, Portugal or Ireland. And what about the problems of Greece! That would also require further bailouts. Hence, in terms of monetary support for future bailouts, the new attempt does not look promising. In addition, there is still no agreement on the more intrusive powers for the European Commission over the fiscal policies of the debt ridden states. What is more, absence of the UK in the new treaty is a big blow as Mr Cameron has warned the new euro plus bloc that it would not be able to use the resources of the EU.

Hence, while this deal may calm the storm for some time, it totally lacks the potential to solve the growing crisis in the EU. The attempt to get the United Kingdom on board is still on. Even if all 27 members have agreed to this new treaty, there is a long way to go. A strong political will, genuine concerted effort, more monetary support and stricter fiscal reforms would be required to tame the existing debt monster in the Eurozone.