Auto shifts markets into lower gear

Markets continued to go downhill during the closing hours of trade, thus ending the day significantly in the negative. The BSE Sensex lost around 110 points (down 0.6%) whereas NSE Nifty shed in the region of 30 points (down 0.6%). Fall in BSE Midcap and Small cap indices was even greater, with both the indices losing in the region of around 1% each. Two stocks declined for every one that gained ground on the Sensex today.

Among global indices, while Asian indices closed mostly in the green today, mixed trend is being observed in Europe currently. The rupee was trading at Rs 47 to the dollar at the time of writing.

India specific concerns outweighed the positive global sentiment in the markets today. Last week's stress tests for the European banking system came in much better than expected and this boosted most Asian indices today. However, investors in the Indian markets had a few other news items to ponder over as well and this eventually tilted the scales in favour of bears. Weakness in a few index heavyweights, auto stocks in particular, weighed heavy on the markets today. In fact, stock of Maruti Suzuki, India's largest passenger car manufacturer was taken to the cleaners today, with the stock losing nearly 13% in one trading session alone. Hero Honda was not far behind, losing around 7% of its value at the start of the day. Together, these two stocks accounted for more than 40% of the Sensex losses today. Furthermore, things do not look good on the interest rate front also as the central bank looks all set to hike interest rates when it meets up for a policy review meeting shortly. Suddenly, few dark clouds seem to have formed on the horizon.

Bharat Forge, the auto ancillaries major was also amongst the few companies that announced their quarterly results today. The company put up a much improved performance as compared to same quarter last year. On a standalone basis, revenues rose by 76% as both domestic sales as well as exports logged in good growth rates. Its operating profits more than doubles as it managed to achieve a strong margin expansion. Net profits went up by more than 60 times as it reaped the benefits of greater operating as well as financial leverage. The fact that extraordinary losses were lower also helped matters. Its overseas subsidiaries also did well as its consolidated topline went up by 66% YoY and net profits came in the positive as opposed to a loss during same quarter last year. The quarter has been quite encouraging for the company with growth coming in from all geographies across automotive and non automotive business. The stock however closed lower by around 2% today.

FMCG major Dabur was another company that announced its first quarter results today. Consolidated net profits for the company were higher by 21% YoY and this came about on the back of a similar topline growth. As per a daily, the growth was driven by strong volume growth across categories like hair oils, skin care, health supplements and home care. What more, the company's international business registered a topline growth of 29% YoY led by Nigeria, Egypt and North Africa. The company's board has also recommended issuance of one bonus share against each share held. The stock though closed lower by around 4% today, seemingly on the back of general selling pressure.

Investors dump Maruti on poor results
01:30 pm

The Indian markets continued to trade below the dotted line during the previous two hours of trade. Stocks from the auto space continued to lead the pack of losers with the BSE-Auto Index trading lower by 2.3%. It was followed by stocks from the realty, banking and capital goods spaces as the BSE-Realty, BSE-Bankex and the BSE-Capital Goods indices were trading lower by about 0.5% to 1%. On the overall BSE, the decline to advance ratio is poised at 1.2 to 1.

The BSE-Sensex is trading lower by around 60 points (down 0.4%), while the NSE-Nifty is down by about 17 points (down 0.3%). Stocks from the small cap stocks and midcap spaces are also seeing some pressure as the BSE-Midcap and BSE-Smallcap indices are trading lower by 0.4% and 0.1% respectively. The rupee is trading at 46.86 to the US dollar.

Auto stocks are currently trading weak led by Maruti Suzuki and Hero Honda. Weakness in Maruti is on the back of the company reporting a decline in profits for the quarter ended June 2010. This was despite a healthy 27% YoY increase in revenues. The growth in revenues was on the back of a 25% YoY increase in volumes. While domestic sales (about 84% of total volumes) rose by 23% YoY, exports increased by faster 38% YoY. Within the domestic market, the company's A3 (SX4, Dzire), C (Omni, Versa) and A2 (Alto, Wagon-R, etc) categories reported volumes increases of 45% YoY, 51% YoY and 16% YoY respectively. It may be noted that the A2 segment forms about 70% of the domestic volumes of the company.

Maruti Suzuki took a beating at the operating level as operating profits were flat during the quarter. Operating margins contracted by a sharp 2.6% YoY during the quarter and stood at 9.6%. The decline in margins was on account of higher raw material costs and royalty expenses. During the quarter, the company paid an additional royalty of Rs 1.9 bn, which includes about Rs 652 m for the December 2009 to March 2010 period. This basically means that the company had to pay royalty expenses with a retrospective effect. Apart from a poor operating performance, lower other income and higher depreciation charges led to a 20% YoY decline in profits. This is the first drop in profits in the previous five quarters.

Realty stocks are trading down with JP Associates and HDIL as the biggest losers. As per a leading financial daily, DLF is buying out the stake of its partner, Limitless Group, in the 50:50 joint venture to make Bidadi Knowledge City in Karnataka. The transaction is estimated at Rs 2 bn. The Bidadi project was to come up in an area of 9,178 acres and was expected to generate around Rs 500 bn as per DLF's estimates in 2007. However, it should be born in mind that this valuation was given before the financial crisis stuck; affecting real estate valuation and shortly after DLF was listed. The project which still has not taken off was to have office complexes, shopping malls and entertainment space. Besides this, the project was to have housing facility for 700,000 people. The work was to start in the first half of 2008 and get completed by 2016.

However, DLF is purchasing Limitless' equity in the JV at a price lower to what Limitless had paid. This is because the JV was not able to secure the land and Limitless' parent company, Dubai World is restructuring its businesses, in particular, Limitless' real estate assets. Another possible reason for Limitless' exit could be the three-year lock-in clause for foreign investment in real estate sector. Foreign direct investment (FDI) norms do not allow repatriation of original investment up to three years from the time of minimum capitalization of realty projects. But foreign investors have a window of exit before the lock-in period ends if the Foreign Investment Promotion Board (FIPB) allows it.

Sensex down on auto stocks
11:30 am

After starting today's session on a positive note Indian indices have shed most of the early gains. Other key Asian markets are, however, trading mixed. Stocks from consumer durables and IT sectors are trading positive while stocks from the realty space are in the red. The auto stocks are trading deeply in the red.

The BSE-Sensex is trading down by around 30 points, while the NSE-Nifty is down by about 11 points. Some buying interest is being seen amongst the small cap stocks as the BSE-Smallcap is higher by 0.1%. The BSE-Midcap index is however trading weaker by 0.2%, with mid cap stocks losing favour. The rupee is trading at 46.86 to the US dollar.

Finance company stocks are trading mixed with Indiabulls Financial Services and Shriram Transport trading positive. Mahindra Finance recently declared its 1QFY11 results. Its interest income grew by 24% YoY on the back of 31% YoY growth in advances. Assets under management also grew by 27% YoY. The value of assets financed grew 76% YoY over the past 12 months. Its disbursements largely favoured auto/utility vehicles and cars. Net interest margins dropped from 6.3% in 1QFY10 to 5.5% but, profits grew by 85% YoY during 1QFY11. This was largely on the back of growth in interest income and write back of provisioning. Other income however, fell 4% during the quarter. Its capital adequacy ratio remained healthy at 17.4% at the end of 1QFY11.

Realty stocks are trading weak with HDIL and Orbit Corporation leading the pack of losers. However, DB Realty and Peninsula Land are trading flat. As per a leading news daily, Anant Raj Industries (Anant Raj) plans to develop 5 hotels in 3 and 4 star categories in the coming quarters. The company plans to lease out these hotels or operate it by themselves under a tie-up with hotels chains. Anant Raj has tie up with three hotel operators namely Seasons, Aitken Spence and Althoff Hotels.

In 2008, Anant Raj had curtailed its hospitality plans due to the overall slowdown in the sector. However, on the back of better macro economic trends it seems that the company has revived its hospitality plans. Improved outlook and commonwealth games in the NCR region this year should increase the hospitality demand further. It should be noted that Anant Raj has 7 hotels strategically located close to the Delhi airport. This should help maintain/increase occupancy and average room rates (ARR). Earlier, the company stated it will invest Rs 60 bn to buy land primarily in the NCR region to launch different projects. It has already spent Rs 20 bn to acquire land in Manesar and Sonepat in the NCR region.

Markets open on a volatile note
09:30 am

The Indian markets have started today's session on a volatile note. The benchmark indices opened below the breakeven mark, but soon moved into the positive territory. However, they have not managed to hold on to their gains since then. Other key Asian markets are in the green with Japan (up 1.2%) leading the pack of gainers. The US markets closed higher by 1% last Friday.

Currently in India, heavyweights from the BSE-Sensex are trading strong with telecom and software majors attracting investors' interest. The BSE-Sensex is trading lower by around 45 points, while the NSE-Nifty is down by about 15 points. The rupee is trading at 46.91 to the US dollar.

FMCG stocks have opened the day on a positive note. Gainers here include Dabur and HUL. Godrej Consumer Products recently announced its 1QFY11 results. The company reported a growth of 47% YoY in sales during the quarter. This came on the back of strong growth of domestic and overseas business as well as from the inclusion of the financials of Godrej Sara Lee. The company's operating margin fell by 1.2%% YoY during the period. This was due to the higher raw material and advertisement costs partly offset by lower staff costs and lower other expenditure (all as percentage of sales). Net profits grew by 67% YoY during the quarter, aided by strong topline growth and one time exceptional income. Adjusted for the one time exceptional income, net profit has grown by 9% YoY during the quarter.

Steel stocks have opened the day on a positive note. Gainers here include SAIL and Bhushan Steel. As per a leading business daily, SAIL's 20% follow-on public offer (FPO) may not happen in 2010 due to certain regulatory hurdles. It needs to appoint independent directors on its board, a proposal for which is with the Appointments Committee of the Cabinet. India's largest steel maker has 12 official directors on board, besides two independent directors. It would have to hire at least 10 more independent directors to become SEBI compliant. Earlier, the steel secretary had expressed hope that the FPO could hit the market by November this year. But now, March next year appears more likely for the Rs 160 bn issue.

IPO process to become dangerous

The stock market regulator SEBI has stepped in several times in the past to protect small investors from greedy promoters and fund managers. There is no denying this fact. But there have also been instances when what the regulator did was detrimental to the interests of small investors.

Take for instance one regulation that the SEBI is thinking as of now. That of having separate days for retail investors and institutional investors when it comes to applying to IPOs.

SEBI is considering a proposal wherein institutional investors would be first asked to submit their bids for an IPO, possibly in the first two days. Then the remaining two days would be open only for retail investors. This is provided the IPO is open for four days.

The thought behind such a thought is ridiculous, and serious!

The SEBI thinks that retail investors have traditionally followed cues from large institutional investors in putting in their bids on the last day of an IPO. So if the big investors pour money into an IPO, retail investors are seeing toeing their line. And if big investors do not like a particular IPO, retail investors again follow suit and shun the issue.

However, in recent times, even the big investors have been seen waiting till the last moment. This has led to a large chunk of retail investors missing on the opportunity to invest in the IPOs where institutional investors have come in during the last hours.

Thus the SEBI is thinking of separately allowing these two categories of investors to apply to IPOs. It thinks that it will help a retail investor to take cues from the institutional investor and do whatever the latter is doing.

Nothing can get more annoying than this!

Why is the SEBI trying to direct the action of the retail investor to whatever the big guy on the street is doing? Hasnít it taken lessons from the past where retail investors have burnt their fingers just because they did whatever the institutional investors were doing? We continue to wonder. Do you have any answer?