Party continues on Dalal Street
Closing

Even five days after the start of a new year, the celebrations seem to continue in the Indian stock markets. With today's gains, the markets are nearly at their highest in 21 months. In fact, nothing seems to be giving away as the rally is broad-based, across sectors. The biggest gainers for today were stocks from the metals and realty sectors.

The BSE Sensex and NSE Nifty closed with gains of around 125 points (0.7%) and 45 points (0.9%) respectively. Mid and small cap stocks followed suit. The BSE Midcap and BSE Smallcap indices closed higher by around 1.2% and 0.9% respectively. On the broader BSE, two stocks gained today for every stock that lost out.

Metal stocks led today’s gains in the broader markets. Key gainers from the sector included Nalco, Hindalco, and JSW Steel. While commodity prices looking promising over the next few months, so do the medium term prospect of some of these companies. Specifically with respect to the two aluminium companies - Nalco and Hindalco - speculation of rise in Chinese alumina prices seems to have excited investors in these stocks. However, while this rise in alumina prices is owing to a supply shortage, experts are not expecting the same to continue for long. Anyways, these companies are also taking hikes in their final product prices, which will prove beneficial for their financials.

IT stocks were amongst the weak performers today. The BSE IT index managed a mere 0.5% gains. Marginal gains were seen in Wipro, Infosys, and TCS. After a brilliant run in 2009, wherein the IT index was amongst the top sectoral performers, the new year has started on a weak note for the same. One reason could be the fair valuations at which most IT stocks are trading at currently. Then, the rupee’s appreciation against the US dollar owing to large foreign inflows into India is also casting some pressure on the sector’s medium term outlook.

Remember, an appreciating rupee affects IT companies’ margins. This is because every dollar earned can then be converted into lesser number of rupees while the rupee costs for these firms do not change much. With economists expecting the rupee to strengthen further, profits of IT companies can take some hit during the coming quarters. But that doesn’t change our long term outlook on the sector, which is positive. We believe that the value proposition for IT offshoring remains strong and this will benefit the right kind of companies from the sector over the next 5 to 10 years.

Auto stocks closed mixed today. While gains were seen in M&M and Bajaj Auto, selling pressure was seen in Tata Motors and Maruti. This again seems a case of profit booking after these stocks surged sharply during the previous year. Maruti for instance multiplied almost four times during 2009. The company, India’s largest passenger car maker, is said to be planning a capacity expansion to take on its rivals that are introducing new models to challenge the former’s dominance.

The company will be using a part of its large Rs 50 bn of cash reserves to fund such an expansion. It is also looking at selling record 1 m units of its vehicles during FY10, as compared to around 0.8 m units it sold in FY09. While the company’s long-term prospects remain bright, we can’t say the same of the stock’s current valuations.

Auto stocks sole losers
01:30 pm

The markets pared some of their earlier gains on account of minor profit booking activity witnessed during the previous two hours of trade. Stocks across sectors are witnessing a field day with those from the metal and banking sectors leading the pack of gainers. However, most stocks from the auto sector are witnessing declines.

The BSE-Sensex and NSE-Nifty indices are trading higher, up by 105 points and 40 points respectively. The BSE-Midcap and BSE-Smallcap indices are also trading higher, up by 1.3% and 0.9% respectively. The rupee is trading at 46.10 to the dollar.

According to a leading business daily, Bharat Forge, a leading forging company is planning to invest Rs 12-15 bn in non-automotive sector businesses over the next 3 to 4 years. The company which primarily caters to the automotive industry wants to expand in the non-auto sectors like aerospace, marine and nuclear power plants. It invested around Rs 4 bn in non-auto businesses in last two years. The future projected investment is expected to be towards manufacturing forgings of upto 500 tonnes for large nuclear and other power plants. It may be noted that the company currently manufactures forgings to the tune of 40-50 tonnes and generates around 22% of its sales from non-auto sectors. It aims to achieve 40% of its topline from non-auto sector by 2012.

In order to expand in the desired segments, the company had already developed facility at Pune and Baramati. The future investment will go to these two facilities along with a facility at Mundra. The company will make subcritical and supercritical power plant equipment at Mundra facility under a JV with Alstom. We believe this move will help the company in long run in tapping the growing demand in India for heavy industry components. Indian markets are highly dependent on imports for critical components on account of lack of technology and domestic capacity.

Pharma major Cadila Healthcare is planning to launch its H1N1 vaccine in India by April 2010. The company yesterday commenced the clinical trials of its vaccine after it received a go ahead signal from Drug Controller General of India (DCGI) for conducting clinical trials on humans. With this, Cadila Healthcare has overtaken many other pharma and biotech companies in getting approvals for conducting clinical trials for this H1N1 vaccine. The company plans to conduct the clinical trials in 10 centres in Ahmedabad, Bangalore, Pune and Jaipur. The company expects to complete the trials by end of March 2010, after which the study results will be sent to DCGI for approval. It expects DCGI approval by April 2010 and will be ready to launch the vaccine in the same month. To start off with, the company will be ready with the infrastructure to produce 6 m dosages, which it plans to double by the end of the FY10. As per reports, the market for this is expected to cross US$ 7 bn by 2011. The stock of Cadila Healthcare is currently trading higher on the bourses.

Metal, banks bouy the markets
11:30 am

The markets continued their northward journey on account of sustained buying activity witnessed during the previous two hours of trade. Though stocks across all sectors are witnessing a field day those from the metal and banking sectors are leading the pack of gainers.

The BSE-Sensex and NSE-Nifty indices are trading higher, up by 145 points and 45 points respectively. The BSE-Midcap and BSE-Smallcap indices are also trading higher, up by 1.3% and 1.1% respectively. The rupee is trading at 46.17 to the dollar.

According to a leading business daily, Tata group's jewellery and watch arm, Titan is looking to triple its revenue in the next 5 years. It plans to raise its topline from Rs 46 bn in this fiscal to Rs 140 bn by 2014-15. In the jewellery category which leads its topline, it plans to strengthen its position in the high-end designer jewellery segment. Tanishq is expected to contribute around Rs 100 bn by next 5 years. Here, it is diverting its focus from the recession-hit US market. It is planning to adopt a design-robust, diamond led and large store intensive strategy. The company sees a lot of opportunity in the Indian jewellery market which is slated to grow from Rs 800 bn to around 1,250bn by 2015. Rather than focusing on low-end everyday wear jewellery, the company will focus on wedding jewellery segment.

In the watch segment, it is diverting its focus towards smaller international markets like Vietnam, Oman and Qatar. We believe that the company's sales growth will be impacted in the current fiscal on account of rise in gold prices which dented the volumes.Nevertheless, its investment in brands should start paying off in the near future.

As per a leading business daily, Cipla, India's second largest pharma company (by market value) is in talks with leading global generic drug manufacturers like GSK and Israel's Teva for supplying generic drugs. Cipla is planning to strike a deal for one or two specific products and is not planning to sell any stake to any partner company. Cipla has been in a number of such negotiations with drug majors like GSK, Pfizer and Boehringer Ingelheim. It may be noted that global drug makers like GSK and Pfizer which are plagued by falling drug prices and increasing generic competition, are eyeing low-cost destinations like India as a source for supplies. This is good news for drug makers like Cipla as supply tie-ups will help their topline growth. Cipla is one of the world's largest producers of low-cost drugs for fighting HIV AIDS. Presently, it has a market value of US$ 5.5 bnand expects to rake in US$ 1.1 bn in sales for FY10.

India reflects strong Asia
09:30 am

The Indian markets have started on a strong note. The benchmark indices opened near the breakeven mark, but soon managed to surge into the positive territory where they have stayed since then. Asia is currently trading in the green with Hong Kong (up 1.6%) leading the pack of gainers. The US markets closed higher by 1.5% yesterday.

Currently, in India, heavyweights from the BSE-Sensex are trading in the green with metal stocks leading the pack of gainers. The BSE-Sensex is trading higher by 147 points, while the NSE-Nifty is up by 40 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 0.9% and 0.8% respectively. The rupee is trading at 46.29 to the US dollar.

FMCG stocks have opened the day on a mixed note. Gainers here include Marico and Pidilite. However, Gillette India is in the red. As per a leading business daily, Marico has bought Colgate Palmolive's hair care brand Code 10. It is the third-largest selling brand in Malaysia. However, the value of the deal has not been disclosed. In our view, this development is part of the company's strategy to push for revenue growth in South-East Asia. It also consolidates its position with an eye on fighting future competition in India. Interestingly, Marico does not plan to launch the product in India with the same branding. It may be noted that Indian FMCG majors have been on an international buying spree in the last couple of years. Marico itself had acquired Egypt based Hair Code in 2009.

Energy stocks have opened the day on a mixed note. Gainers here include Chennai Petro and Reliance. However, HPCL and BPCL are in the red. As per a leading business daily, Reliance Industries has raised Rs 27 bn by selling shares held by its treasury. Reliance's treasury stock or about 26 m shares was created following the merger of Reliance Petroleum with Reliance Industries. The shares were sold to Life Insurance Corporation. The most likely use of the funds would be to buy LyondellBasell, the bankrupt petrochemical major that Reliance Industries is trying to acquire. It was earlier estimated that the deal would cost around US$ 12 bn. However, LyondellBasell has filed a revised plan with its bankruptcy court which is likely to raise the acquisition cost.

Emerging mkts attractive, but then...
Pre-Open

Emerging markets were the talk of the town in 2009. While the developed world was reeling under recession, their emerging counterparts were still growing at an enviable pace. And what is more, the aura of the emerging markets is expected to continue in 2010 too according to Mark Mobius, executive chairman of Templeton Asset Management. In an interview with the Economic Times, Mobius has opined that emerging economies are forecast to grow approximately four times faster than developed economies. This in turn would be reflected in their stock markets.

Not just that, he believes that investors still tend to discount emerging markets as too risky. As a result, valuations in emerging markets are still lower than those of Europe and the US making the former attractive. Further, interest rates in the developed world are at one of their lowest. Therefore, most investors are looking for a better return on their investment. This means that they are putting their money to work in equities in emerging markets.

The interesting thing is what Mobius had to say on valuations of these emerging markets. Already there has been a spectacular rally, most notably in the stockmarkets of Brazil, Russia, India and China. As a result, concerns have already started emanating that valuations here are beginning to look frothy. Valuations at the end of 2009 were certainly not as cheap as they were at the end of 2008. At the same time, Mobius believes that current valuations are around the middle of their historical 10-year range. Therefore, he says, there are opportunities in terms of solid companies that can survive even in a downturn.

We believe that emerging markets have tremendous growth potential from a long term perspective. At the same time for the medium term, valuations do look a tad bit stretched. Hence, investors will have to be all the choosier while picking their stocks. They will have to make sure that they do not pay a very high price even for a strong company.

Big Pharma in an acquisition mode
Big Pharma is at it again! Yes, we are talking about big ticket acquisitions. Hardly had the ink dried on the Pfizer-Wyeth deal, the Swiss drugmaker Novartis has now gone ahead and acquired the remaining stake in Alcon. The latter is the world’s largest eye-care company and Novartis has acquired the same for US$ 39.3 bn. The Pfizer-Wyeth deal had taken place at a time when the financial crisis was at its peak. At that time there was growing talk of splitting ‘big’ companies hit hard by the crisis to make them more transparent and manageable. But that deal and the current Novartis one only highlights that Big Pharma is more concerned about a problem which it considers to be the bigger one - patent expiries of their blockbuster drugs.

Many of the big pharma companies have not really been able to replenish their pipelines at the same pace as in the 90s. Plus, there has been an increasing preference for generics. This has put added pressure on their sales and profits. So on one hand Big Pharma is foraying into generics . And on the other, it is acquiring R&D based companies with a niche focus to fill the product portfolio.