Markets succumb to earnings anxiety
Closing

After a reasonably strong start today, the Indian markets succumbed to investor anxiety about the upcoming earnings season. As the session progressed, heightened profit booking pressure on the heavyweights drew the indices closer to the dotted line. By the final hour, the selling activity pushed the BSE Sensex into the red. While the BSE Sensex closed lower by around 14 points, the NSE Nifty remained flattish (gains of around 5 points). The BSE Midcap and BSE Smallcap indices, however, managed to buck the trend. They gained around 0.9% and 1.9% respectively. The BSE FMCG and Oil & Gas indices were the key losers today.

Barring India, most Asian indices closed in the green today while the European indices have opened on a mixed note. The rupee was trading at Rs 45.38 to the dollar at the time of writing.

As per a business daily, after deciding to split its parent firm into functional verticals, DLF has now identified an overall new organisational structure. The country's largest real estate firm will now be broadly divided into three units Devco, Rentco and the holding firm dealing with corporate functions. While Devco will incorporate all real estate ventures of the company, Rentco will take charge of all its rent-yielding assets like offices and malls. Going forward, any rent-yielding asset developed by any of the verticals under Devco will be shifted to Rentco. A new quasi entity will be created called DLF Holdings, which will aggregate the company's investments in areas such as hotels, clubs, convention centres, DLF Pramerica Life Insurance and asset management, DLF Metro JV, DLF Golf Resorts and PVR. The new corporate structure is expected to ensure better business focus and efficient use of capital for the company. The stock ended higher along with its peers in the realty space.

As per a leading business daily, Swiss pharma company Novartis AG, the parent of Novartis India, has been granted a patent protection for its anti-cancer drug 'Nilotinib' in India by the Chennai Patent Office. This is a superior version of the blood cancer drug 'Gleevec' for which a patent was rejected in the country. Novartis AG markets 'Nilotinib' globally as 'Tasigna' and is used as the second-line therapy for 'Gleevec'-resistant patients. The drug was approved in the US three years ago. Most likely 'Nilotinib' will be marketed in the domestic market through Novartis India. Further, because a patent has been granted for this drug, no generic versions of the same will be allowed in the domestic market. This will enable Novartis India to earn higher revenues and margins from the drug. The development is a key positive for MNC pharma companies operating in India.

In another news, the investigation wing of the income tax (IT) department in Mumbai has unearthed a record Rs 13 bn in undisclosed income in the first nine months of FY10. The cases involve 16 companies, including 10 that are publicly traded. According to data compiled by the I-T department, the concealed income in FY10 was 56% more than the disclosures made in full fiscal year 2009. The listed entities searched by the department include Housing Development Infrastructure Ltd (HDIL), ABG Shipyard, Allcargo Global Logistics, Juniper Networks and Polycab Wires. While the lapse in income tax compliance will certainly take a blow on the companies' tax dues, it also reflects very poorly on their overall corporate governance practices.

Maruti to take competition head on
01:30 pm

Indian markets remained flattish in the last two hours of trade. Currently, stocks in the reality, metal and PSU space are trading firm while stocks in the oil and gas sector are trading weak with heavy weights like Reliance and ONCG trading in the red.

The BSE-Sensex and the NSE-Nifty are currently trading above the dotted line by around 65 points and 22 points respectively. Stocks from the midcap and small cap spaces are currently trading in the green, with the BSE-Midcap and the BSE-Smallcap indices trading higher by 90 points and 181 points respectively. The rupee is trading at 45.35 to the US dollar.

The BSE auto Index was trading higher by 60 points at the time of this commentary. Keeping to international norms, Maruti is refurbishing its entire portfolio by launching new variants of existing models. However, the new variants of smaller cars are expected to be launched at lower prices than existing models. This is seen as a move to take on global biggies like Toyota, Honda and Volkswagen who are launching small cars in India. The company had taken on a cost reduction exercise in the wake of the Nano launch. This is expected to lead to more competitive pricing for the company’s products. Maruti has also reduced the engine size of its popular model Swift. This has resulted in the car being placed in a lower excise duty slab. The company is expected to pass on these benefits to its customers. 2010 is expected to be a tough year for Maruti with the company expected to play a volume game in the face of increased competition.

The BSE FMCG index was trading higher by 25.5 points with Nestle India being the highest gainer with an increase of 1.4%. According to a leading daily, FMCG companies like GlaxoSmithKline, Nestle, Hindustan Unilever, Marico, Godrej and Dabur are making a bee line to capture the bottom of the pyramid (BOP) customers. This segment estimated at 350 m individuals, is the fastest growing consumer segment. Marketers are not only betting on smaller pack size to capture this market but are also launching products specifically for this segment. This space neglected till now is large in terms of potential consumers; however the income level for this segment is quite low. The average earning is estimated to be less than Rs 100 per day. For this reason, FMCG companies will have to research their consumer’s preferences and tastes thoroughly to be successful.

SBI foresees muted growth
11:30 am

Indian markets continued to trade on a firm note during the previous two hours of trade. Currently, buying activity is being witnessed across sectors led by stocks from the realty, IT, telecom and metal. However, the oil & gas sector is finding it difficult to garner investors’ interest.

The BSE-Sensex and the NSE-Nifty are currently trading higher by around 95 points and 27 points respectively. Stocks from the midcap and small cap spaces are currently trading in the green, with the BSE-Midcap and the BSE-Smallcap indices trading higher by 1.3% and 2% respectively. The rupee is trading at 45.37 to the US dollar.

As per a leading business daily, India’s largest public sector bank, SBI has slashed down its credit growth estimated for FY10 on account of slow pickup in demand for loans. The bank initially expected a credit growth of around 25% for FY10. However, due to weakness in credit demand it witnessed a loan growth of just 16% in the first 3 quarters (i.e. April to December) of FY10. It now expects an overall credit growth of 18% for the entire fiscal. Another area of concern for the bank is the new NPA (non performing assets) norm imposed by the RBI according to which the banks need to have a loan-loss coverage ratio of around 70%. SBI currently has a loan to loss ratio of about 50%. Given the slow growth in loan disbursals, achieving the stipulated ratio will be a daunting task for SBI as its balance sheet size is huge.

Though the bank has no plans of equity issue, it is contemplating about introducing 10-year retail bonds in order to tap the retail investors. However, SBI has asked for approvals from the regulatory authorities for the same and will first test the market acceptance before coming with any big issue. SBI has had slow yet a market leading loan growth for the current fiscal. The Indian banking industry witnessed an average credit growth of 11. 5% so far in FY10. Despite the bank’s reach and credibility, we believe that NPAs and asset liability mismatch will affect SBI’s performance in the medium term.

According to a leading business daily, GAIL is planning to ramp-up its gas transmission operations in the next couple of years. The company plans to generate around 65% of its EBIT (earnings before interest and tax) from gas transmission from the current levels of 53%. It may be noted that its transmission business with large asset base, secular demand growth, long term earning visibility and direct customer interface has all the ingredients of a complete utilities company. The gas availability in India is expected to grow by 23% to 312 m standard cubic meter per day (mscmd) by FY14. We believe that this gas surge brings a big opportunity for companies like GAIL. GAIL is making significant investment of as much as Rs 30-35 bn in its pipeline networks and plans to double its overall capacity by 2013. We believe such forward looking strategic investment will go a long way for the company.

Stocks begin on a strong note
09:30 am

After a lacklustre last week, Indian markets have started this one on a strong note. The benchmark indices opened above the breakeven mark and have managed to stay in the positive territory since then. Other key Asian markets are also trading in the positive with Hong Kong (up 1.5%) leading the pack. The US markets also closed higher by 0.1% last Friday.

Currently in India, heavyweights from the BSE-Sensex are trading in the positive with power and auto stocks leading the pack. The BSE-Sensex is trading up by around 100 points, while the NSE-Nifty is up by 30 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 1% and 1.2% respectively. The rupee is trading at 45.47 to the US dollar.

Auto stocks have opened the day on a positive note. Gainers here include TVS Motor and Hero Honda. As per a leading business daily, M&M plans to enter the motorcycle segment during 2010 with the launch of an in-house developed bike. It may be noted that the company is already present in the ungeared scooters segment. Now it plans to become a significant player in the two-wheeler market cutting across the various categories. As such, the motorcycle will be one among several launches for the company.

The Indian two-wheeler market is estimated at about 8 m units annually. Despite the strong growth posted in recent times, there is still considerable unmet demand in the market in our view. Little wonder then, this year will witness a slew of launches from domestic two-wheeler giants as well as international majors. Steel stocks have opened the day on a strong note. Gainers here include NMDC and SAIL. As per a leading business daily, the steel ministry plans to set up a special arm under SAIL for overseas acquisitions. It is likely to be called SAIL Videsh. It may be noted that the existing vehicle for acquiring mining assets abroad is the International Coal Ventures. However, this joint venture between SAIL, NMDC, NTPC and Coal India has not met with much success in acquiring coal abroad. In our view, India has now stepped up its efforts in acquiring mineral assets abroad driven by rising domestic demand. While the efforts in oil and gas assets have borne fruit under ONGC Videsh, it remains to be seen how SAIL Videsh’s efforts pan out.

Markets: Something's got to give
Pre-Open

The first full week of 2010 did not bring in much cheer for Indian investors. The BSE Sensex trailed global markets, in rising just around 0.4% during the week (ended Jan. 8). High overall valuations remain one of the biggest concerns that investors have at the start of this year. As a matter of fact, the Sensex P/E currently stands at around 22.5 times. This is almost double the level the index was trading at a year back.

Apart from these valuation issues, another concern investors have is of the sustainability of the economic recovery. In effect, we believe markets have become too dependent on unsustainable government stimulus. As The Economist says - "Something’s got to give."

A report in the publication reads, "The effect of free money is remarkable." It suggests that near-zero interest rates in the developed economies of the US, Japan, Europe have persuaded investors to take their money out of cash and to buy risky assets. Count emerging markets like the BRICs into this category of risky assets and the gains of last year will seem realistic.

After all, even you might take higher risk with the money offered to you at zero interest rate. Isn’t it? So what could leave the foreign investors behind? Experts give this the term – carry trade. In simple terms, it means borrowing at a cheap rate (in dollars as of now) and investing for a higher return (like in emerging market assets).

The dollar carry trade seems to be in fashion these days. Investors in emerging markets do not seem to be complaining at all. But what all this can lead to is a wider gap between valuations and the outlook for economic fundamentals in 2010. People have restarted taking higher risk assuming that the cheap money will continue to flow in. And some like the US central bank are only delaying the inevitable by promising to keep money cheap for an 'extended’ time.

Remember, it was this very cheap (and limitless) supply of money that had convinced the Americans to live beyond their means. That caused the subprime crisis!

Now if the central bankers think that this time it is different, and that cheap money can cure the problems caused by this very devil, rude shocks await them. And also for emerging markets where investors have given in to believe that they can buy any stock and the foreigner will come the next day to buy it from them at a higher price!

As The Economist concludes - "Today the prices of many assets are being held up by unsustainable fiscal and monetary stimulus. Something has to give."

We also believe that apart from a gush of cheap global money, what also matters is the underlying fundamentals of companies. And if those remain weak or are fully reflected in stock prices, then no matter how excessive the liquidity, buying stocks may turn out to be a dangerous proposition.

Investors could do well to remember this very important lesson from history, whose latest chapter has the year '2008’ inscribed in it headline.