Volatility plagues Indian bourses

Indian stock markets had a volatile outing today as they oscillated to either side of yesterday's close. Whatever attempts were made to notch gains were thwarted by profit booking at higher levels. Selling activity took toll in the final hour as the indices closed below the dotted line. While the BSE-Sensex closed lower by around 18 points (down 0.1%), the NSE-Nifty closed lower by around 10 points (down 0.2%). The BSE Midcap and BSE Small cap bucked the trend as they closed higher by 0.1% and 0.2% respectively. Gains were seen in consumer durables and IT stocks, while oil & gas and banking stocks were at the receiving end.

As regards global markets, Asian indices closed mixed today while European indices have also opened on a mixed note. The rupee was trading at Rs 44.49 to the dollar at the time of writing.

Auto stocks closed mixed today. While the key gainers were Maruti and M&M, Hero Honda and Ashok Leyland were at the receiving end. Maruti announced its results for the quarter and year ended March 2011 a short while ago. The company reported a 19% YoY and 25% YoY growth in sales for 4QFY11 and FY11 respectively led by growth across all product segments. For the full year, while sales from the A2 segment stood at 28% YoY, the A3 and C segment saw sales growing by 32% YoY and 59% YoY respectively. Operating margins, however, fell by 3.4% to 7.2% in FY11. The company was impacted largely by a rise in input costs and expenses incurred on new model launches. Adverse currency movement particularly on exports also impacted profits. All this percolated down to the bottomline which fell by 8% YoY. For the quarter growth in net profits was flat.

Nestle India declared its 1QCY11 results. Topline for the quarter grew by 22.1% YoY on the back of higher volumes and higher price realization. While domestic sales grew by 23.1% YoY, exports grew by 10.2% YoY. Operating (EBITDA) margins remained flat at 21.1% (as a percentage of sales). Lower cost of raw material was more than offset by higher other expenditure (both as a percentage of sales). Cost of raw material was lower as a result of improved product/channel mix and reduction in free goods promotion, partially offset by increase in commodity cost. Other expenditure was higher due to special charges for the redesign of existing factory layout to increase production. Net profit of the company grew by 26.7% YoY on the back of higher operating income, increase in other income, fall in interest and lower effective tax rate. The stock closed higher today.

Markets trading flat
01:30 pm

The benchmark indices in the Indian stock market traded flat in the last two hours of trade. Stocks from Consumer Durables and Software space are trading firm, while those from Oil & Gas and Realty are trading weak.

Both BSE-Sensex and NSE-Nifty indices are trading flat. BSE Midcap and BSE Small cap indices are trading up by 0.2% each. The rupee is trading at 44.45 to the US dollar.

Energy stocks are trading mixed with MRPL, GAIL and ONGC leading the pack of gainers. The stocks of Reliance Industries and Petronet LNG are trading in the red. As per a leading financial daily, GAIL is in talks with US based Chevron to acquire stakes in its deepwater natural gas blocks in Indonesia. As per the company sources, the preliminary discussions have already been held. The company expects Chevron officials and upstream regulator for Indonesia (BPMIGAS) to come to the country soon for further talks. As of now, there are no details on amount of stake. If the deal goes through, it will help GAIL to access LNG for India and will act as a natural hedge for its business. GAIL has expressed intention to take 30 m tonnes per annum of LNG from Chevron's deepwater projects in Indonesia over a period of 13 years (2014-2026). The combined gas reserves in these fields are estimated to be more than 3 trillion cubic feet.

Engineering stocks are trading mixed as well with Bharat Bijlee, Shanthi Gears and Elgi Equipments leading the pack of gainers. However, Suzlon Energy and Alstom Projects are trading weak. As per a reputed news website, BHEL has said that its consortium with Alstom has successfully bagged a contract for steam turbine generators. The order is worth Rs 16 bn and has been placed by Nuclear Power Corporation of India for its 2x700 MW Kakrapur Nuclear Power Station in Gujarat. This being the first ever order for Steam Turbine Generators for new rating 700 MW nuclear sets pressurised heavy water reactors is a major breakthrough for BHEL.

In a separate development, the Ceramic Business Unit (CBU) of BHEL is also setting up a plant to manufacture glass insulators for transmission lines with an aim to increase the plant capacity. The management plans to increase the capacity of Jagdeeshpur plant in U.P from 1 lakh units per annum to 1.8 m units per annum with an investment of Rs 1 bn. The stock of BHEL is trading in the green currently.

Small, midcaps in favour today
11:30 am

The benchmark indices in the Indian stock market remained close to the dotted line in the initial hours of trade. Stocks from the FMCG and consumer durables space are trading in the green and those from the realty and oil & gas space are trading in the red.

The BSE-Sensex is up by 19 points while NSE-Nifty is trading 2 points below previous closing. However, BSE Midcap and BSE Small cap indices are up by 0.3% and 0.4% respectively. The rupee is trading at 44.48 to the US dollar.

Auto stocks are trading mixed with Escorts and M&M leading the gains while Force Motors and Maruti Suzuki are trading weak. As per a leading financial daily, Maruti Suzuki is planning to shift the production of 0.3 m cars from Gurgaon to its new plants at Manesar once these are ready. The auto company presently manufactures all cars at three Gurgaon units spread across 300 acres of land. These include models like Swift, M800, Omni, WagonR, Ritz, Alto, Eeco and Gypsy. It also makes engines, making about 700,000 units a year of the K-Series engines and about 450,000 units per year of F, G and M-Series engines.

Maruti has an existing plant at Manesar and is investing Rs 36.3 bn on two new plants there with an aim to decongest the Gurgaon facilities. This will enable production of more engines and other parts by utilizing the idle space and workforce at Gurgaon. It may be noted that the auto maker had rolled out 0.95 m units from Gurgaon in 2010-11 out of a total installed capacity of 0.85 m units.

FMCG stocks are trading firm led by Pidilite Industries and Camlin Limited. As per a leading financial daily, FMCG majors such as Britannia, Coco Cola and PepsiCo are introducing products in the low price category. These companies are targeting the rural markets with products at the Rs 5 price point in an effort to boost volumes. For example, Britannia to drive consumption is selling premium biscuits under the Tiger and Treat brand at lower price points. According to estimates, Britannia has been able to enjoy a market share of 34.9% due to its focus on rural markets. In spite of the high commodity inflation witnessed recently, Britannia was able to maintain its market share on account of its rural distribution.

It may be noted that the bottom of the pyramid segment currently contributes only 20% of India's consumption. However, this segment is believed to be at the cusp for explosive growth. According to estimates, half of India's consumption in 2015 would come from households with an income of up to Rs 25,000 per month. Lower price points are helping to penetrate rural areas and establish brands.

Indian stock markets open flat
09:30 am

Asian stock markets have opened the week on a mixed note. While stock markets in Hong Kong (up 1%), South Korea (up 0.7%) and Japan (up 0.3%) are trading firm, markets in China (down 0.7%) and Indonesia (down 0.2%) are facing selling pressure. Indian stock markets have started the day on a flat note. Stocks from the consumer durables and FMCG space are trading firm. However, oil and gas stocks are leading the pack of losers.

The BSE-Sensex is trading marginally lower by around 2 points (0.01%), while the NSE-Nifty is down by around 4 points (0.1%). However, mid and small cap stocks are trading firm, with both the BSE Midcap index and BSE Small cap index up by 0.3% and 0.5% respectively. The rupee is trading at 44.52 to the US dollar.

Oil and gas stocks have opened the day on a weak note with RIL, IOC and Petronet LNG leading the losses. The government has directed Reliance Inds (RIL) to immediately stop supplying gas from KG-D6 block to refineries, steel firms and petrochemical plants. Instead, it has asked the company to divert the volume to meet the demand of priority sector consumers as specified by the Empowered Group of Ministers (EGoM). The move has come on the back of a drop in the RIL-operated block's output by about 28%. The block is currently producing about 50 mmscmd gas which is much lower compared to the 69.8 mmscmd according to the plan approved by the government.

As a consequence of the decline in gas output, there has been a pro-rata cut of up to 15% in supply to priority sector consumers such as power and fertiliser companies. Now, with the government's order to restrict KG-D6 supply to only priority consumers, the other consumers such as IOC's refinery in Gujarat, GAIL's Pata petrochemical plant, RIL's petrochemical projects in Gujarat and Maharashtra and Essar Steel will be affected.

Pharma stocks have opened the day on a firm note with Ranbaxy Lab, Orchid Chem and Dr Reddy's leading the gains. Biocon is planning to invest about Rs 1.5-2 bn in the current fiscal year 2011-12 towards Research and Development (R&D) and manufacturing. The biotechnology major is setting up a dedicated R&D facility in Bangalore. This would require an investment of Rs 1 bn. The proposed facility would be able to accommodate about 600 scientists. Apart from investing in R&D, the company will also invest Rs 500 m in the API manufacturing facility in Hyderabad over the next two years. It has already invested Rs 500 m in the facility so far.

End of the telecom honeymoon?

The telecom space in India was touted as one of the highest growth sectors in the country. This was way back in 2008. The sector was seeing its subscriber base grow at a phenomenal rate of 74% (compounded annual growth rate, CAGR, from 2005 to 2008). And the growth in the subscriber base was visible in the growth in revenues for the telecom operators. India's largest telecom operator, Bharti Airtel, saw its revenues grow by nearly 59% (CAGR) during the same period.

So it was not surprising that everyone wanted to set up their own telecom operations in the country. Be it domestic players or international ones. There was a long queue for the 2G spectrum and license that was to be given out by the government in 2008. Even companies which had no prior experience in telecom were suddenly interested in setting up a telecom shop. Even real estate companies like Unitech and DB Reality joined the cue. The competition for the license was so intense that some of these companies resorted to any possible means in order to obtain the license. And this formed the roots of the infamous 2G scam.

As a result of this, there were several companies that now had a telecom license but had no clue how to set up operations. They went ahead and invited foreign partners. These partners were some of the biggest names in the global telecom industry. They had deep pockets and years of expertise. It was now being touted that the Indian incumbent operators would start seeing worsening days. The international players were expected to and did change the scene. Rates were now becoming increasingly competitive as these new operators went all out to garner market share. It seemed for a while that the newly formed alliances would shine over the old incumbents.

But jump to 2010, these partnerships came under the scanner as the government started investigating into the dealings of the 2G scam. As days passed, names were being shouted out and more recently heads have begun to roll. Just a few days back, the honchos of Unitech and DB Reality were sent to jail on the charges of bribery and forgery. (These were the heads of Unitech Wireless and Etisalat-DB Reality telecom operations). Following this, Telenor, the Norway based telecom group that is the partner for Unitech Wireless, has asked the Chairman of Unitech to step down from his post as Chairman of Unitech Wireless.

We all know that relationships that are based on lies and deceit do not go a long way. Such seems to be the case for the telecom partnerships that were formed out of the 2G scam. With the unfolding of such events, it appears the newly formed partnerships are now coming to an end. For now it appears to be the end of the honeymoon that these companies were enjoying.