'Realty' bites Indian markets

Led by realty and oil & gas stocks, Indian markets recorded a weak performance today. Stocks from the pharma and auto spaces however managed to buck the trend and closed in the positive. On the BSE, one stock gained for every stock that closed in the red.

The BSE Sensex and the NSE Nifty closed with losses of around 175 points (1%) and 60 points (1.2%) respectively. Stocks from the mid and small cap spaces also followed suit. The BSE Midcap and BSE Smallcap indices closed lower by around 0.7% and 0.4% respectively. The rupee was trading at 46.85 to the US dollar at the time of writing.

Other Asian markets also closed weak today. Big losses were seen in the benchmark indices of China (down 2%) and Hong Kong (down 1%). European markets have opened in the positive. Gold is currently trading up by around US$ 10 an ounce to yesterday's closing levels.

Banking stocks closed weak today. Leading losers included the likes of ICICI Bank, Axis Bank, IDBI Bank, and PNB. These were weighed down by expectations that the RBI might raise interest rates soon to tame rising inflation. This is the fifth straight weak day for banking stocks. Pressure on these stocks is simply because higher interest rates from the RBI would mean higher cost of funds for banks. This would subsequently force them to raise their own interest costs thereby leading to a possible decline in credit offtake.

Sure, the RBI is now expected to raise interest rates to curb the rising inflation. But will that have any impact? We ask this as the current rise in food prices is not really because of rising demand for the same. It is instead owing to supply shortages due to a weak monsoon this year. In fact, we had the weakest monsoons in 37 years and then flooding in some parts of the country. This disrupted agricultural production thereby leading to the current shortage of food grains. Therefore, we see any rate hike from the RBI having a minimal impact on food prices. But this will definitely be a worry for banks.

Realty stocks also felt the pinch of expectations of an interest rate hike. Stocks like DLF and Unitech led the losers' pack among the large caps. These companies are already facing the after-shocks of a recent increase by the RBI in provisioning requirement for advances to the commercial real estate sector from 0.4% to 1%. Now with an improving economic scenario and rising inflationary expectations, economists expect interest rates to rise from here on. This will have a negative impact on demand for new houses. Anyways, the demand has not really picked up to the pre-crisis levels largely owing to still high realty prices and caution on the part of the buyers.

Investors in Tata Motors must be a happy lot these days. The stock even after multiplying nearly five times over the past year, continues to lead the gainers' list among the Sensex heavyweights. Recovery in volume growth in the Indian markets and surging export volumes have seemingly propped investor interest towards the stock. Not to mention the expectations of a fast improvement in its balance sheet that was roiled after last year's acquisition of the troubled Jaguar-Land Rover (JLR) brands. Other auto stocks that gained today were Hero Honda and Eicher Motors.

Realty, energy pull markets lower
02:30 pm

Strong selling activity led the Indian markets to drop into the red during the past half hour. Selling activity is being witnessed in stocks across sectors led by realty, energy, FMCG and banking. However, stocks from the healthcare, auto and consumer durables sectors have still managed to find investors' interests as their respective indices are trading in the green. Currently, the overall decline to advance ratio is poised at 1.2 to 1 on the BSE.

The BSE Sensex and NSE Nifty are currently trading in the red, down by 140 (0.8%) and 45 points (0.9%) respectively. The BSE-Midcap has followed suit and is currently trading lower by about 0.5%. However, the BSE-Smallcap Index is trading flat. The rupee is trading at 46.84 to the dollar.

Engineering stocks are currently trading weak led by Punj Lloyd, Crompton Greaves and Cummins India. Wind energy equipment manufacturer Suzlon Energy today announced that it has paid back US$ 780 m (approximately Rs 37 bn) of the loans which it had taken to acquire Hansen Transmission. Hansen is a Belgium based company which is involved in the business of manufacturing gear boxes. By paying this amount back, the company has supposedly reduced its debt on books by about 15%. Ironically, the funds used to repay this debt were raised by selling stake in Hansen. This process was done last month. In addition, the company has also taken a US$ 465 m (about Rs 22 bn) loan from State Bank of India. As per the management, this transaction has concluded the first phase of the company's refinancing exercise.

It is reported that this move has resulted in a US$ 350 m (about Rs 17 bn) debt reduction in the company's books. As per the company's management, Suzlon is continuing to work towards optimizing its capital structure. Considering that the company had a high debt burden on its books, this is a positive development for the company.

Auto stocks are currently trading mixed with Tata Motors, Hero Honda and M&M trading firm, while Bajaj Auto and Maruti Suzuki are trading lower. The stock of Tata Motors is currently the top gainer on the BSE-Sensex. This is on the back of news of the company reporting strong global sales numbers for the month of November 2009. The company reported a 62% YoY increase in total global vehicle sales during the month of November. The total sales volumes stood at 75,775 units. Global sales include those of Tata branded vehicles, Jaguar, Land Rover and Tata Daewoo and Hispano Carrocera range of trucks and buses.

As per the company, domestic auto sales during the month of November stood at 54,108 units, which was higher by about 66% YoY as compared to November 2008. Commercial vehicles sales increased by 81% YoY to 33,338 units, while those of passenger vehicle increased by about 50% YoY to 42,437 units. However, investors also seemed to be cheering the recovery of sales of its JLR brand. JLR together reported a growth of 30% YoY in sales volumes during the month. The total number of volume sales of its JLR brand stood at 18,825 units.

Banking, telecom lead the decline
12:30 pm

After witnessing a weak start to the day's trades, Indian stock markets remained muted during previous two hours of trade. Though currently in the red, they are inching slowly towards the dotted line. Currently, stocks from the banking, telecom, and oil and gas sectors are trading weak. Stocks from the consumer durables, healthcare, and auto sectors are finding favour.

The BSE Sensex and NSE Nifty are trading in the red, marginally down by around 20 points and 10 points respectively. However, mid and small-cap stocks have managed to buck the trend. The BSE Midcap and BSE Smallcap indices are trading up by 0.4% and 0.9% respectively. The rupee is trading at 46.85 to the dollar.

As per a leading business daily, Indian FMCG major Marico is looking outfor acquisition targets in Asia and Africa. It plans to grow inorganically in the beauty and wellness segments particularly in the emerging markets where it can leverage its experience in India. It is also seeking options in more populated countries like Egypt and South Africa. However, markets like the UK are not on the cards as they are very difficult to operate in. The company along with its competitor Godrej Consumer Products is reported to be already scouting for a skin-care brand 'Simple' in the UK.

It may be noted that Marico witnessed a 16% YoY growth in revenues and 27% YoY growth in net profits during 1HFY10. This was supported by volume growth across categories coupled with decline in raw material costs. The company has been reinvestingits savings through falling raw material prices into brand building. This is showing in terms of further volume growth. We believe that in the domestic market, the company has significant growth prospects over the long run. In the international markets, while the company has been successful in acquiring new companies, the challenge lies in successfully assimilating them.

As per a leading business daily, Indian IT majors like Infosys, HCL Tech, and Wipro have joined the race with global IT giants like IBM and HP-EDS for US$ 500 m worth of outsourcing contracts from Westpac, Australia's second largest bank. The bank has embarked on an IT transformation project with the aim to save around US$ 400 m from operations by 2010. IT outsourcing is expected to be a big chuck of this programme. Apart from this, Westpac is also planning to dole out an IT application development and maintenance contract worth US$ 250 m.

This seems like a significant opportunity for Indian IT companies to strengthen their foothold in the US$ 39 bn Australian IT market. It may be noted that according to Forrester, a global IT research firm, Australian banks are expected to invest around US$ 4 bn in technology this year. Stocks from the sector are trading mixed currently.

India joins weak Asia
10:30 am

The Indian markets have started on a weak note. The benchmark indices opened below the breakeven mark on the back of weak global cues. They have not managed to break into the positive territory 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 1.3% yesterday.

Currently, in India, heavyweights from the BSE-Sensex are trading a mixed bag with auto and software stocks leading the pack of gainers. However, banking majors have failed to garner investors' interest. The BSE-Sensex is trading lower by 38 points, while the NSE-Nifty is down by 13 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 0.1% and 0.3% respectively. The rupee is trading at 46.85 to the US dollar.

FMCG stocks have opened the day on a mixed note. Gainers here include Henkel India and Pidilite, while HUL is in the red. As per a leading business daily, FMCG major Godrej Consumer Products (GCPL) is looking to buy the international household products business of US-based Sara Lee. It may be noted that Sara Lee plans to sell off its non-core food business. Its household products include Good Knight, Hit, Kiwi and Biotex. In fact, it had sold its body care division to Unilever for US$ 1.9 bn and has agreed to sell its Ambi Pur air care business to Procter & Gamble for US$ 468 m. GCPL's interest stems from the fact that it is seeking to expand globally after having established itself in India. It is also in the process of buying out the 51 % stake of Sara Lee in Godrej Sara Lee. In fact, GCPL plans to raise Rs 30 bn for acquisitions. In our view, this is an extension of GCPL's strategy of taking the inorganic route to boost its growth with a major focus on the personal care segment in the last 2 years. It has expanded the business into the international markets through acquisitions in U.K, South Africa and U.A.E.

Energy stocks have opened the day on a mixed note. Gainers here include HPCL and Indian Oil, whle BPCL is in the red. As per a leading business daily, oil marketing companies such as Indian Oil, BPCL and HPCL want a price cut of as much as Rs 8 in the procurement price of biodiesel. They are ready to pay only around Rs 26 per litre as the landed price at blending location. However, the producers are seeking a price of Rs 34.50 per litre. The main area of contention is taxation. Including VAT, customs and excise the price of biodiesel exceeds that of diesel itself. In our view, the government must ensure that taxes do not act as a disincentive for the oil marketing companies at a time when it is trying to push cleaner fuels.

Will the RBI budge now?

In what might burn a deeper hole in your pocket, India's food price inflation is now nearing 20%! This is as per data compiled by the commerce ministry. It shows that food prices on an average increased by 19.95% during the week ended December 5. This is higher than the 19.05% food price inflation that was recorded in the previous week.

Graphic Source: Reuters

So, is there a way the government can control these rising prices that are hurting the aam aadmi?

Sure, the Reserve Bank of India (RBI) is now expected to raise interest rates to curb the rising prices. But will that have any impact? We ask this as the current rise in food prices is not really because of rising demand for the same. It is instead owing to supply shortages due to a weak monsoon this year.

In fact, we had the weakest monsoons in 37 years and then flooding in some parts of the country. This disrupted agricultural production thereby leading to the current shortage of food grains. Thereby, we see any rate hike from the RBI having a minimal impact on food prices.

Of course, if the economy were to continue to gain pace and demand for food items also rise, it would act as a double whammy for prices and the RBI is then expected to chip in with higher interest rates. But not much can be expected from the central bank till then.

So what's the solution now?

"Imports," says the Finance Minister. As a matter of fact, food prices are politically sensitive in India and the government is under pressure from opposition parties and allies to contain inflation. This is especially because food prices are hurting the poorer sections in the country