Anxiety over RBI's next move
Closing

Selling pressure intensified during the closing hours of trade, leading to the markets ending lower on yet another occasion today. While BSE Sensex edged lower by around 104 points (down 0.6%), NSE Nifty closed with a loss of around 40 points (down 0.7%). BSE Midcap and Small cap indices also came in the firing line today, as they shed more than 1% each.

While Asian indices closed mixed today, a negative trend is being witnessed among European indices currently. Rupee was trading at Rs 45.5 to the dollar at the time of writing.

Today's weakness perhaps had its genesis in India's robust growth in industrial output in the month of November. As per reports, India's November industrial output grew at its fastest pace in 2 years as it rose 11.7% YoY. This not only surpassed expectations of most economists, but it also sets the stage for a sooner than expected interest rate hike by India's central bank. Coming as it does just days before the RBI is all set to undertake its monetary policy review exercise, it makes the case for an interest rate hike all the more potent. If not interest rate hikes, the RBI looks all set to withdraw excess liquidity from the system by way of a CRR hike. Little wonder, the market chose to express their anguish through a bout of profit booking.

Metals stocks were amongst the top losers on the index today, thus leading to an end to their recent mini rally. Counters like Tata Steel, Sterlite and SAIL lost in the region of 3%-4% each today. For one, disappointing earnings from US aluminium heavyweight Alcoa seems to have rubbed off on Indian metals stocks as well, and secondly, investors also seemed to have taken some profits off the table in view of the recent rally that had seen most of the sector stocks witness decent gains. Prospects from a medium to long term perspective continue to remain attractive what with strong growth in the Indian economy and rush towards hard commodities and commodities producing companies on account of the expected weakness in the US dollar.

IT stocks populated the list of top gainers in the BSE 'A' group today. Infact, half of the top 10 gainers amongst the 'A' group stocks came from the IT sector. The catalyst no doubt was the better than expected show put up by Infosys during the third quarter of the current fiscal year. Most importantly, it has managed to improve its operating margins despite the impact of an appreciating rupee. The management believes that even though the IT budgets are expected to be flat in 2010, offshore outsourcing is likely to benefit from the ongoing economic recovery. A view not far from what we have. Heavyweights like TCS, Wipro, Infosys and HCL Tech all closed in the positive.

GE Shipping preparing for next upturn
01:30 pm

Indian markets continued to remain volatile in the last two hours of trade and failed to make inroads into the positive territory. Currently stocks in the IT, media and oil and gas space are trading firm while stocks in all the remaining indices are trading weak. The realty sector is the top loser with heavyweights weighing on the indices.

The BSE-Sensex and the NSE-Nifty are currently trading under the dotted line by around 11 points and 10 points respectively. BSE-Midcap Index fell sharply during trade and is trading lower by 15 points. The BSE-Smallcap index continues to trade in the green up 26 points. The rupee is trading at 45.41 to the US dollar.

According to a leading daily, Great Eastern (GE) Shipping is planning to acquire new ships. The company had sold 15 ships and cancelled orders for 3 new ships in the last 18 months. However a sharp correction in asset prices has prompted the company to start building assets for the next upturn. The company has a cash reserve of Rs 30 bn which it plans to use for its new acquisitions. At present, GE Shipping has 37 vessels while the company’s order book consists of 7 vessels, of which 5 are dry bulk carriers and the remaining 2 are Suezmax tankers. These 7 vessels are expected to be delivered in 2011 and 2012. The new acquisitions will help grow GE shipping’s top line without putting pressure on the company’s balance sheet.

The BSE Bankex is trading lower by almost 1%. Yes Bank is planning to set up a private equity firm under the name Yes Ventures. This firm is expected to be set up in 2010-2011. While the initial target proposed for the fund was US$ 500 m, the fund had to be scaled down to US$ 200 m due to the muted economic conditions. The bank intends to invest this money in clean technology focused funds in South East Asia. Yes Bank has indication that the company intends launching a new fund in 2010-2011. This fund will focus on small and medium enterprises in the sunrise sector. We believe that with a number of private sector banks like ICICI, Kotak and Axis Bank already present in the private equity space, the competition will be tough for Yes Bank.

Investors cheer Infosys' performance
11:30 am

After a weak start, the Indian stock markets managed to recover and traded in a narrow range during the previous two hours of trade. Currently, stocks from the banking, realty, metal and FMCG sectors are trading weak, while stocks from the IT, telecom, oil & gas and auto sectors are finding favour.

The BSE Sensex is trading in the green, up by about 10 points, while the NSE Nifty is trading lower by 4 points. The BSE-Midcap and BSE-Smallcap indices are trading higher by 0.4% and 0.9% respectively. The rupee is trading at 45.46 to the dollar.

India's second largest IT exporter, Infosys, declared its 3QFY10 results today. The company bettered performance by registering a topline growth of 3% QoQ during the quarter backed by around 6% increase in volumes and strong deal flow particularly from the US and banking and financial services vertical. However, industries like manufacturing and telecom still remain muted. The company expanded its operating profit margin by around 1% despite weaker dollar and increase in employee cost and sales and marketing expense. The bottomline also increased by 3% QoQ on account of higher volumes.

Infosys outperformed its own revenue and EPS guidance for this quarter by a decent margin of 5% and 18% respectively. It now expects an overall growth of 3.8% and 2.4% in revenues and EPS for FY10. We believe that company's consistent better than expected performance as well as the future guidance is a testimony of improving demand environment for the IT services industry. Infosys, along with its other IT peers like TCS and Wipro is trading in the positive.

According to a leading business daily, Indian FMCG major, ITC is planning to launch new products in the personal care space in the current year. It plans to enter talcum powder space either under its existing brands like brands Fiama Di Wills, Vivel and Superia or an all together new brand. It will subsquently enter the deodrants and skin cream categories by leveraging the talc business. It is believed that this strategic move is logical in the sense that the company has no presence in the talc and deo categories where the rivals like Dabur, Emami, Procter & Gamble, HUL are quite strong. We believe that the company will need a very strong product as well as perseverance in order to gain foot hold in the skin care market which is difficult to penetrate. FMCG stocks are currently trading in the red.

Down on Asian cues
09:30 am

The Indian markets have started on a weak note. The benchmark indices opened above the breakeven mark but have not managed to stay in the positive territory since then. Asia is currently trading in the red with Taiwan (down 0.6%) leading the pack of losers. However, the US markets closed higher by 0.4% yesterday.

Currently, in India, heavyweights from the BSE-Sensex are trading in the red with metal and banking stocks leading the pack of losers. However, the software heavyweights are in the green. The BSE-Sensex is trading lower by 4 points, while the NSE-Nifty is down 1 point. However, buying interest is being witnessed among mid and small-cap stocks as the BSE-Midcap and BSE-smallcap indices are trading higher by 0.3% and 0.6% respectively. The rupee is trading at 45.48 to the US dollar.

Energy stocks have opened the day on a mixed note. Gainers here include Reliance Industries and BPCL. However, Gujarat Gas is in the red. As per a leading business daily, ONGC has asked for an income tax holiday on the production of natural gas. It may be noted that the production of 'mineral oil' receives a 7-year income tax holiday under section 80-IB (9). The Finance Bill in 2009 provided the holiday with a retrospective effect. However, ONGC wants the tax holiday period with prospective effect and that too extended from 7 years to 10 years.

Infrastructure sectors such as power generation and distribution benefit from a 10-year holiday. The upstream major is also seeking inclusion of natural gas in the proposed Goods and Services Tax regime in order to bring uniformity in the levy of sales tax. In our view, the tax holiday should be extended to natural gas. India desperately needs domestic sources of hydrocarbons. It is inviting international investors under the New Exploration Licensing Policy. Hence, it makes little sense for it to deny the same benefits that other high priority sectors receive.

Banking stocks have opened the day on a weak note. Losers here include SBI and HDFC Bank. As per a leading business daily, SBI is expected to set aside more funds to meet the new norms that mandate 70% provision coverage for non-performing assets (NPAs). In its mid-term credit policy review, the Reserve Bank of India said that banks would have to attain a minimum 70 per cent coverage ratio by September 2010. Provision coverage ratio is the ratio of a bank's total provisions to gross NPAs. Currently, SBI's coverage ratio is around the 58% mark. Bank of India is at the 68% mark, while Indian overseas bank is at 62%. In our view, the RBI is correct in enforcing the provision norms. However some more clarity with regard to calculation and risk weightage is still needed.

The bitter battle over sugar
Pre-Open

The domestic price of sugar reached new highs last week led by a supply shortage. Imported sugar costs about Rs 37,500 per tonne. Domestic sugar costs about Rs 40,000 per tonne. The supply of sugar in India is pegged at around 16 m tonnes per annum. Demand is about 23 m tonnes. As a result, India will experience a shortfall for the second year in a row. An additional import of 1 m tonnes of sugar is on the cards.

The high sugar prices are now kicking off a political battle. Between the Agriculture ministry in the centre and the UP state government. It may be noted that India's second largest sugar-producing state, Uttar Pradesh has banned the import of raw sugar. However, the ban came after farmers protested demanding higher prices for their crops from sugar mills. The Union minister believes the ban causes a deficit of about 250,000 tonnes per month. In fact, about 770, 000 tonnes of sugar is lying at various ports right now. While it is easy to blame the state government, the matter is not quite so simple. No political party can afford to alienate the farmers. Be it state governments or the union government. In the long term, such situations cannot be avoided by blame games in our opinion. The way agricultural produce is procured and distributed in India needs a thorough revision. The leakages must be plugged. At the same time no party to the sugar trade should be able to benefit from everyone else's expense.

The peculiar case of Indian real estate
The threat of the financial meltdown now seems far behind us. At least that's how one would feel going by the recovery in the stock markets. During the crash, the worst hit segment was the real estate pack. Now, they have also swung up. Surely then, the real estate market must have recovered. Not quite. Real estate prices haven't recovered a great deal after a correction which ended six months ago. Yes, interest rates are low. The economy has shaken off the slowdown. And the demand for housing remains. But much of the supply is in the expensive segment. As per the Wall Street Journal, developers in places like Mumbai are able to sell only about 20% of their inventory per month. In 2007, the figure was 33%. In our opinion, developers must realise that too many of them are trying to offer products that's unaffordable for most Indians. But we don't expect that to happen anytime soon. Not at a time when as many as 15 real estate IPOs are set to debut in the stock markets.