Flat on the eve of the budget

The benchmark indices gave up almost all their losses during the closing hours of trade and ended virtually flat today. Thus, while the Sensex closed almost unchanged from yesterday's levels, Nifty also displayed a similar trend. BSE Mid cap and Small cap indices on the other hand ended somewhat lower today, losing 0.4% and 0.2% respectively. The advance to decline ratio on the Sensex was also quite evenly split today with there being nearly equal number of gainers as well as losers.

Most Asian indices closed lower today whereas majority of European indices have opened on a positive note. At the time of writing, the rupee was trading at Rs 46.4 to the dollar.

With any other major event of note absent, the fact that the markets recovered from the day's lows does indicate that the economic survey has gone down well with investors. And why not? A survey, which projects that India could soon enter the rarefied domain of double digit growth within the next few years has to be taken positively indeed. Besides, projection of a lower fiscal deficit in the coming years is also a heartening sign. Both these factors are likely to rub off quite positively on corporate earnings in the times to come and consequently, on the share prices as well. Thus, while the markets did manage to erase almost all its gains, they seemed to be perhaps saving the bigger fireworks for tomorrow.

Tata Motors, India's largest CV manufacturer emerged amongst the top losers on the Sensex today. In fact, the stock is down nearly 26% from its yearly high levels, achieved a few weeks back. Quite a few factors seem to be weighing down the company's share price currently. While fears of stimulus roll back by the Government, which in turn could hurt vehicle demand is one of them, things are also not looking all that rosy on the international subsidiary front. JLR management is believed to be locked in some fierce arguments with the labour union over issues related to job cuts and wages. Ever since the crisis broke out and sales of luxury vehicles plummeted, the management of JLR has been trying hard to keep the company afloat and resort to strong cost cutting measures like laying off excess workforce. But the union seems to be having nothing of it. Clearly, if the current deadlock persists, the company may have trouble creating enough value out of JLR in order to justify the price it paid for it.

After HDFC Bank, ICICI Bank, India's largest lender in the private sector has hiked deposit rates. As per a daily, the bank hiked rates in select tenures by as much as 50 basis points (0.5%) with immediate effect. However, this still falls short of the hike undertaken by HDFC Bank where there was upto 1.5% hike in deposit rates across some maturities. More importantly, these steps taken by two of India's largest private sector banks do certainly point towards a higher interest rate regime going forward. It will not come as any surprise if more lenders also follow suit in the coming days. However, certain banks like SBI, which still have surplus liquidity, may be able to delay rate hikes by a few more weeks and thus, help reduce the pressure on its NIMs.

Eco survey fails to enthuse markets
01:30 pm

Despite prospects of higher GDP growth cited in the Economic Survey for FY10, the Indian markets continued to trade in the negative territory during the previous two hours of trade. Currently, stocks from FMCG, oil & gas, auto, metal and banking sectors are weighing heavily on the indices. However, the stocks from capital goods, healthcare, realty and consumer durable sectors are managing to garner investors' interest.

The BSE-Sensex and the NSE-Nifty are currently trading lower, down by around 60 points and 15 points respectively. The stocks from the midcap space are also bearing the brunt of profit booking with BSE-midcap index down by 0.2%. Nevertheless, small cap stocks are still finding favor with the BSE-smallcap index trading marginally higher by 0.05%. The rupee is trading at 45.36 to the US dollar.

Software stocks are currently trading mixed with Wipro, Infosys and Patni Computers trading firm, while Mphasis and HCL technologies are trading weak. The Indian IT industry is likely to see projects coming ir way soon. It is believed that the governments - central and state - are likely to call in bids for three major IT projects this year. These are believed to the home ministry's police mission mode, the agriculture ministry's pilot projects and the ones under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM). While the Mission Mode project for police, which would be a crime and criminal tracking system by the ministry of home affairs, would be worth about Rs 25 bn, the ministry of agriculture projects would be worth about Rs 2 bn. This would be towards understanding of the requirements in six states. Further, some parts of the JNNURM initiative which is worth Rs 50 bn are also expected to see bids being invited for citizen-centric services.

It may be noted that the above mentioned projects are part of the overall Rs 230 bn National e-governance Plan (NeGP), which is expected to be spent over the next few years. We believe that this is a win-win situation for the government as well as the Indian IT companies. While the government can improve the delivery mechanism and operations of its projects, Indian IT industry has a lot to gain from the widening Indian IT market.

Capital goods stocks are currently trading firm as the BSE-Capital Goods Index is trading higher by 0.9%. Stocks that are leading the pack of gainers include Crompton Greaves, L&T and Punj Lloyd. A leading business daily has reported that engineering and construction major L&T has signed a joint venture agreement with Karnataka Power Corporation for setting up power plants. As per the agreement, the two companies will jointly set up two coal-based thermal power plants of 800 Mw (megawatt) each at Godhna in Chhattisgarh. The total cost of these projects is estimated at Rs 100 bn. Work on this project is expected to be completed in three years. It is believed that both the companies will invest an equal amount in this venture.

In another development, the company is reportedly looking at borrowing nearly Rs 100 bn (US$ 2.2 bn) to fund certain road and power projects. During FY09 L&T’s debt to equity ratio stood at a high 1.5 times. However, it should be noted that power projects by default use high amounts of debt, to the tune of about a 70:30 debt to equity ratio. Going by that, the large amount of debt the company is looking to take may be a required as part of the nature of its business.

Small caps buck the trend
11:30 am

After witnessing a strong opening today, the markets fell into the red on account of persistent profit-booking during previous two hours of trade. While stocks from the FMCG, auto, metal, banking and oil & gas sectors corrected the most, buying activity was witnessed in capital goods, consumer durables and healthcare stocks.

The BSE-Sensex and the NSE-Nifty are currently trading lower by around 42 points and 11 points respectively. While the stocks from the midcap space are also trading in the red, with the BSE-Midcap index trading marginally lower by 0.03%, small cap stocks have managed to buck the trend. The BSE-Smallcap index is trading up by 0.1%. The rupee is trading at 46.39 to the US dollar.

According to a leading business daily, ITC is planning to foray into the UAE food market through a partnership with a Gulf company, Al Seer Group. It may be noted that the company currently does not market any of its products in the UAE and Gulf Cooperation Council (GCC) market. Nevertheless, it has big plans for the same. The company has struck a strategic alliance with Al Seer Group for distributing its confectionary products in the market. It will market its Sunfeast wheat biscuits, cookies, crackers, candies, éclairs and chews in the target markets. It is also participating in the ‘Gulfood’ exhibition for the first time this year.

It is worth noting that the company that ventured into the biscuit segment in India in 2003 with its brand Sunfeast, has managed to capture 10% market share since then. We believe that this is a good move given that food portfolio forms a significant part of ITC’s FMCG business which contributes around 14% to its consolidated topline. During 3QFY10, its branded packaged foods business grew by 24% YoY on the back of improved product mix, smarter sourcing of inputs, improved servicing of markets, and supply chain efficiencies.Currently ITC is trading in the red.

As per a leading business daily, Wipro Infotech, Wipro’s business unit overseeing Indian domestic IT market has won an IT contract worth Rs 1 bn from Punjab and Sind Bank (P&SB). According to the contract, Wipro Infotech will be responsible for integrating the bank’s branches with an IT network as well as implementing Infosys’s core banking solution, Finnacle. It may be noted that this contract was previously given to erstwhile Satyam Computers in 2006. However, its failure to deliver the contract on time resulted in dissolving of the contract.

Wipro Infotech which has already worked on such contracts rolling out core banking solutions for a bunch of PSU banks like Oriental Bank of Commerce, Dena Bank will procure both hardware as well as software for the contract. This 10 year contract is strategic for the company as P&SB aims to become a Rs 1000 bn bank by 2011 for which it will significantly increase its branch network and services. We believe Wipro’s focus on domestic IT sector will aid it in strengthening its foothold in the fast growing Indian IT market. The company already generates over 20% of its consolidated revenue from India. Wipro is currently trading in the positive on BSE.

Markets start on a strong note
09:30 am

The Indian markets have started today's session on a positive note. The benchmark indices opened above the breakeven mark and have managed to remain in the positive territory since then. Other key Asian markets are trading a mixed bag with China (up 1.1%) leading the pack of gainers. The US markets closed higher by 0.9% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading a mixed bag with auto and software stocks attracting buying interest. However, cement stocks are in the red. The BSE-Sensex is trading higher by around 25 points, while the NSE-Nifty is up by about 5 points. Buying interest is also 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 46.28 to the US dollar.

Banking stocks have opened the day on a mixed note. Gainers here include Central Bank and Bank of Baroda. However, SBI is trading in the red. As per a leading business daily, India's largest lender SBI plans to raise around Rs 100-200 bn through a rights issue. The bank is expecting an announcement in the upcoming Union Budget on the matter. The banking giant needs capital to the tune of Rs 400-500 bn over the next five years over and above the tier-II capital and retained profit. One of the main areas where the bank will invest in is information technology, including its ATM network, mobile banking, data warehousing and a payment gateway. It may be noted that any rights issue by a state owned bank like SBI will require the government to also inject funds as the main shareholder.

Energy stocks have opened the day on a mixed note. Gainers here include Gujarat Gas and Petronet LNG. However, ONGC is trading in the red. As per a leading business daily, ONGC is seeking growth opportunities in Latin America and Africa but not in Canadian oil sands. It is also keen on assets in Russia and the adjoining areas. The public sector oil and gas exploration and production major has recently bagged the exploration rights for a major project in Venezuela through a tie-up with Spain's Repsol. In our view, state owned energy giants from both China and India are on an asset acquisition spree around the world. There is a growing appetite for energy in the Asian giants as vast chunks of their population adopt a more energy intensive lifestyle. As a matter of fact, the government often helps the energy companies by putting it diplomatic weight behind them in the negotiations.

What's delaying the FDA approvals?

The USFDA has been the bane of pharma companies of late. Not complying with good manufacturing practices have landed many of them into trouble notably Ranbaxy and Sun Pharma. These events in many ways relegated into the shadows another equally serious problem dogging the FDA. This has particularly been the delay in product approvals of generic companies. Not just Indian companies but other generics players as well were confounded with this problem in last year itself when sales were slow due to a lower approval rate.

Meanwhile, ANDA applications at the US FDA have piled on. And what is more, this problem may be costing consumers and the federal government hundreds of millions of dollars a year as they continue in some cases to pay for branded drugs even after their patents expires. It is obvious that the US FDA needs to speed up its approval process. But what has really been dogging the US regulator? Limited staff and underfunding seem to be the main culprit. As reported in the New York Times, five years ago, the FDA typically approved a new generic drug within 16.3 months of the application's filing. But by last year, with limited staff to review an increasing number of applications, approvals for new generic drugs were taking 26.7 months.

The importance of generic drugs in the US cannot be undermined. These drugs now account for 70% of the prescriptions filed in the US and have saved US$ 750 bn for consumers over the last decade. And so, Indian generic players can be assured of a ready market for their generic drugs. The fact that there also exists intense competition and pricing pressure is another problem altogether and an important one at that. However, these concerns aside, the next few years will be important for Indian players due to the patent expiry of many branded drugs . And that is why, the US FDA will have to find some way of quickly speeding up its approval process. Luckily for Indian companies, it is not just their interests at stake but also that of the US consumer and the government.

A golden dose for India
India has already garnered the reputation of being the largest consumer of gold. What is more, the country is expected to emerge as a major buyer when the IMF begins selling 191.3 tonnes of the precious metal amid volatility in major currencies. Developed countries of the US and Europe have been severely bogged down by the global financial crisis. In Europe especially, a few countries are on their way to committing sovereign defaults. Little wonder then that the reliability of the two major currencies notably the US dollar and the euro is being increasingly questioned.

And so, the major beneficiary has been gold which has seen its price soar due to its reputation as a safe haven during times of increased volatility. Meanwhile, China, which has about US$ 1.6 trillion in reserves, is a producer of gold. As a result, is unlikely to buy the gold being offered by the IMF. Readers would do well to recall that the RBI has snapped up 200 tonnes of gold from the IMF last year. As reported in a leading business daily, the RBI's gold holdings rose to US$ 18.1 bn (around 6.5% of total reserves) on February 12. While the RBI has not yet given any clear signal of its intention yet, it will hardly be surprising if does end up piling on to its gold booty.