Autos drive the mkts higher

Led by gains in auto and banking stocks, Indian markets closed strong today. IT and telecom stocks were among the few losers. On the broader BSE, one stock gained for one that closed in the red. The BSE Sensex and NSE Nifty closed with gains of around 85 points (0.5%) and 15 points (0.3%) respectively. Midcap stocks followed suit, as the BSE Midcap index closed up by 0.7%. The rupee was trading at 45.33 to a US dollar at the time of writing.

Auto stocks closed strong today. In fact, the BSE-Auto index was the top gainer (up 1.7%) among all BSE indices. Key gainers from the sector included Bajaj Auto, Tata Motors, and Maruti. Gains in Maruti followed reports that the company is looking to hike its car prices as BS4 (Bharat Stage 4) emission norms get implemented from April this year. BS4 will be applicable to NCR (National Capital Territory of Delhi) and other ten cities like Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Ahmedabad, Pune, Surat, Kanpur and Agra.

The company has not quantified the extent of price increase due to application of this new norm. In an interview with The Economic Times, Maruti's Chairman Mr. RC Bhargava has also hinted that with interest rates going up or likely to go up in the course of this year, it will also put some upward pressure on car prices. Keeping all that in mind, he does not expect the total demand growth to be anywhere near what the sector has witnessed in FY10. In fact, he would be surprised to see an even 10% YoY growth next year (FY11).

Pharma stocks closed mixed. While gains were seen in Novartis and Aventis, selling pressure marked trading in Pfizer and Dr. Reddy's. Earlier, Pfizer announces its 1QFY10 results. The company works on a financial year that ends in November. Its sales and profits have each grown by 9% YoY. Operating margins have improved to 25%, from 23% in 1QFY09.

The company has forayed into branded generics in a bid to gain access to a wider market and bolster sales. Two products have already been launched in this category. It is also looking to increase its reach to doctors and the focus will be more on metros and tier I, II, III and IV cities before it ventures into rural areas.

Bajaj touches its all-time high
01:30 pm

While still in the green territory, the Indian markets continued to trade in a range bound manner during the previous two hours of trade. Stocks from across sectors are trading firm at present. Those from the auto, consumer durables, oil & gas and metals spaces are leading the pack of gainers. Stocks from the IT pack are trading lower.

The BSE-Sensex and the NSE-Nifty are trading higher, up by around 75 (4%) points and 20 points (4%) respectively. The BSE-Midcap and BSE-Smallcap are also trading higher, up by around 0.8% and 0.5% respectively. The rupee is trading at 45.36 to the dollar.

Auto stocks are currently in demand as the BSE-Auto Index is trading higher by about 1.4%. The stocks leading the pack of gainers include Bajaj Auto, M&M, Maruti Suzuki and TVS Motor. Bajaj Auto is trading higher by 4.4% on the back of it expecting a strong 40% YoY increase in volumes during the next financial year. Volumes are pegged at about 4 m units next year. This would include nearly one-fourth of sales volumes to be met through exports. The company’s management has set a target of selling over 3.6 m motorcycles and about 0.4 m commercial vehicles. For achieving the same, the company is planning on expanding the overall capacity by about 25%. This will take its capacity to nearly 5 m units. At present Bajaj Auto’s vehicle manufacturing capacity stands at about 4 m units. Of this, about 3.6 m comprises of two-wheelers and the balance is of three-wheelers.

Incidentally, the stock of Bajaj Auto has hit its all-time high today. It may be noted that the stock of Bajaj Auto has by far outperformed the stock of its rival company Hero Honda over the past year. This is on the back of the company recording a much higher year on year growth in volumes. Key reasons for the same were the strong performance of the new launches made by the company. Also, the renewed focus on semi-urban and rural markets aided sales volumes. The fact that the company has a strong foothold in urban markets helped it boost volumes.

Healthcare stocks are currently trading firm led by Glenmark Pharmaceuticals, Panacea Biotec, Ranbaxy and Sun Pharmaceuticals. Glenmark Pharmaceuticals’ US subsidiary Glenmark Generics has announced that it has received the final approval from the US FDA for Calcipotriene ointment 0.005%. A leading business daily has reported that this ointment was marketed by another company named Leo Pharmaceuticals as Dovonex. It is believed that this brand recorded peak sales of approximately US$ 93 m (approx Rs 4.3 bn) during CY06. Leo Pharmaceuticals still markets and distributes a line of Dovonex products including a cream and a topical solution. Glenmark’s version of this ointment is used for treating plaque psoriasis (a chronic skin disease) in adults. This is a positive for the company and will enable it to bolster its revenues from the highly competitive US generics market.

Auto, energy bolster the uptick
11:30 am

The Indian markets continued to move upwards on account of sustained buying activity witnessed during the previous two hours of trade. Stocks from the auto, consumer durables, energy, metal and banking sectors are leading the pack of gainers. Telecom and IT stocks are the only ones failing to garner investors’ interest.

The BSE-Sensex and the NSE-Nifty are trading higher, up by around 96 points and 24 points up by 0.6% and 0.5% respectively. The BSE-Midcap and BSE-Smallcap are also trading higher, up by around 0.9% each. The rupee is trading at 45.40 to the dollar.

According to a leading business daily, state-owned oil major ONGC is scouting for oil-sands acquisition in Canada as a part of its strategy of going global in terms of assets. The company is believed to be evaluating the financials of a Canadian field and is in preliminary talks with the target company. ONGC is planning to buy assets producing about 10,000 barrels of heavy oil a day worth around US$ 1 bn.

It may be noted that the government has asked the two major energy-sector PSUs ONGC and Oil India to make at least one acquisition each in FY11 so as to meet the growing demand in the country. Indian companies are now vying with China for winning overseas energy assets. The dragon nation has spent a huge US$ 32 bn last year for amassing oil, coal and metal assets in overseas markets. Given the exploding demand in the world’s fastest growing economies and China’s aggressiveness in garnering oil-assets, we believe that Indian energy majors with their ageing oil-fields will have to fight really aggressively to fetch oil for India.

As per a leading business daily, state-owned power utility NTPC is in planning to acquire a coal mine having 1.8 bn tones of reserves in Indonesia. NTPC is in talks with Indonesia’s Sugico Group for buying this asset. It is believed that the Indonesian company which has 2 mines has offered one of its mines to NTPC for partnership. This will involve a stake sale along with a long term coal supply agreement. The deal is estimated to be around US$ 1 bn (or Rs 45.6 bn).

It may be noted that NTPC requires around 160 m tones of coal of which 10% is imported. We believe that fresh coal supplies are paramount for NTPC as coal fuels over 80% of its installed capacity of 31,134 MW. It may be noted that the company is expanding its capacity quite aggressively and has pegged a capital expenditure of Rs 177 bn and Rs 240 bn respectively, in FY11 and FY12. However shortage of coal supply at home is a lingering concern for the company.

Markets begin on a strong note
09:30 am

The Indian markets have started today's session on a strong note. The benchmark indices opened at the breakeven mark but quickly marched into the green and have held on to their gains since then. Other key Asian markets are trading in the green with Singapore (up 0.5%) leading the pack of gainers. The US markets closed marginally higher yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading in the green with auto stocks attracting investors' interest. The BSE-Sensex is trading higher by around 66 points, while the NSE-Nifty is up by about 18 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 0.8% each. The rupee is trading at 45.57 to the US dollar.

Auto stocks have opened the day on a positive note. Gainers here include Bajaj Auto and M&M. As per a leading business daily, Tata Motors is selling one third of its stake in its construction equipment subsidiary, Telcon, for Rs 10 bn. The stake will be picked up by Hitachi, which is currently a joint venture partner with a 40% stake. Telcon, an unlisted entity, is India's largest manufacturer of construction equipment. It has manufacturing facilities in Dharwad, Jamshedpur and Kharagpur. It makes construction equipment such as backhoe loaders, excavators, off-highway dump trucks, wheel loaders and large mining shovels. Hitachi had first picked up a 20% stake in Telcon in 2000. It later raised it to 40% in 2005. The latest deal will transfer the ownership of the company from Tata Motors to Hitachi. In our view, this transaction is part of Tata Motors' strategy to divest some of its group companies in order to reduce the debt on its books which has piled up after the Jaguar-Land Rover acquisition in 2008.

Energy stocks have opened the day on a positive note. Gainers here include Indraprastha Gas and MRPL. As per a leading business daily, the oil ministry has asked HPCL to invoke the corporate guarantee given by the United Breweries (UB) Group to recover unpaid jet fuel dues from Kingfisher Airlines. It has also directed HPCL to supply fuel only against a bank guarantee in the future. The UB Group has given a Rs 2.5 bn corporate guarantee to HPCL. Its outstanding dues now amount to over Rs 6 bn. It may be noted that the other public sector oil marketing companies, Indian Oil and BPCL already supply Kingfisher Airlines fuel only on cash and carry terms. In our view, this highlights the difficult economics suffered by both the industries - downstream oil marketing and civil aviation.

FII traffic to face diversion

Most of us know of Mauritius as a great holiday destination. It also has a sizeable population with roots tracing back to India. In financial circles though, it is famous as a tax haven for foreign funds investing in India. It has a double taxation treaty with India. Capital gains on Indian equity investments in the hand of a Mauritian company do not attract any tax here. Due to this agreement, almost 90% of the foreign investment into India comes from the African island. In fact, according to Wall Street Journal, total foreign institutional investment into Indian equities of almost US$ 46 bn came through Mauritius during 9mFY10. Compare that with investment routed through Singapore of around US$ 10 bn during the period.

But all that could change with the new Direct Tax Code set to be introduced next year. The main thrust of the new proposals is to simply the maze of tax exemptions. And one of the exemptions to be removed could be the double taxation treaty with Mauritius. That would affect several foreign private-equity players, hedge funds and mutual funds.

There is still some time before the tax proposals become law. In our view, a lot of pressure will be applied on India to keep the double taxation treaty in some form. But there is also the chance that the government sticks to its guns. After all, it is losing out on a chance to tax money flows amounting to several billion dollars. There is also a global trend wherein governments are getting increasing fidgety about tax avoidance. Especially when most of them have to support expensive stimulus packages. In India’s case, regulators also want to exercise greater control on offshore money flowing into the country. The entire episode over foreign institutional investors (FIIs) and P-notes.

If the double taxation treaty is tweaked, foreign institutional investors will have to re-route their investments. Truth be told, we are not big fans of FIIs in their present form. Most of it is short term money chasing incremental returns. They come in hordes crowding good investments out of the reach of individual investors and often leave in hordes trampling everything and everyone that comes in their way. In our view, changes in the double taxation treaty could trigger a correction for reasons other than fundamental merits of companies. That could create a buying opportunity for individual investors to really dig in.