India shakes off Asia blues
Closing

India was the only Asian market to close in the positive today. Gains here were led by stocks from the IT, telecom and metal sectors. While the BSE Sensex closed higher by around 85 points (0.5%), the NSE Nifty managed gains of around 25 points (0.5%).

Mid and small-cap stocks also followed the Sensex's lead. The BSE Midcap and BSE Smallcap indices closed with gains of 0.6% and 0.9% respectively. The rupee was seen trading at Rs 45.59 to the US dollar at the time of writing.

Among other Asian markets, the indices in China (down 3%) and Hong Kong (down 2.6%) lost the most. Lending curbs imposed by the Chinese policymakers seemed to be the key reason that spooked these markets. Economists believe that China's decision to raise proportion of deposits that banks must hold in reserve, which is a way to pull brakes on lending, is a small first step toward reducing the massive stimulus provided to its economy. While this would go some way in extending a bubble burst in the Chinese property market, we do not see these measures as big enough to prick the bubble in its nip. And that's a big danger to the global economy in 2010.

IT stocks remained in limelight today as well. TCS, Infosys, and Wipro emerged as the major gainers from the pack. These stocks seem to be riding a wave of improved sentiment towards the sector after Infosys pronounced a good future outlook yesterday. Now while TCS and Wipro will be announcing their 3QFY10 results on Jan. 15 and Jan. 20 respectively, investors are seemingly already factoring in similar outlook from their managements. And not without reason!

With an improvement in the global economic landscape, these companies are eying faster decision making from their clients with respect to their 2010 tech spending. As Infosys' management indicated yesterday, volume growth is again picking up and billing rates are sort of stabilizing. With the rupee-dollar volatility as the only major concern these companies face, we do not see any reason IT stocks won't be in limelight in 2010 as well. Investors however need to keep a close track of valuations as most frontline stocks from the sector are already trading at fair valuations.

Cement stocks were also amongst the key gainers today. ACC and Ambuja Cement topped the list. Reports that cement companies are on the verge of raising their product prices led by rising demand seemed to be the reason for today's buying in these stocks. An Economic Times report has in fact pegged the price hike to be in the range of Rs 3 to 5 per 50 kg bag in the northern, southern and western markets. This is the third time in the past three months that cement prices will be raised in these markets.

What the current round of price hikes mean is that the cement market will still take some time to react to the capacity addition, which is expected to take India's total cement manufacturing capacity to around 250 m tonnes by March 2010. Here again, while earnings growth is on a recovery path, investors would do well to understand that valuations of cement stocks aren't really attractive. And this would pare the chances of extraordinary gains from these stocks in the short to medium term.

Plastics major Sintex announced its 3QFY10 results a short while ago. In what might seem as a sign of recovery, the company has managed to grow its net sales by 3% YoY during the quarter. This growth has been led by the plastics division where sales grew 5% YoY. Sales for the company's textile division fell by 6% YoY. What is more, the company managed to improve its operating margins to 18.1% during the quarter, led by lower other expenditure. Otherwise, raw material costs rose on the back of higher commodity prices. Now, despite the 17% YoY growth in operating profits, Sintex's net profits grew by a marginal 2% YoY, dented by higher depreciation costs. The company's management believes that it is seeing some strong signs of a pickup in economic activity that is leading to higher capacity utilization for the company.

SBI tops up growth plans
01:30 pm

Indian markets continued to languish in the red in the last two hours of trade. Currently stocks in the IT and media space are trading higher while stocks in all the remaining indices are trading in the red. The realty sector is the top loser with heavyweights pulling down the index.

The BSE-Sensex and the NSE-Nifty are currently trading under the dotted line by around 98 points and 33 points respectively. The BSE-Midcap Index is trading in the red after falling by 50 points. In the last two hours the BSE-Smallcap index also slipped into the red and is lower by about 14 points. The rupee is trading at 45.63 to the US dollar.

As per a leading daily, India's largest lender SBI is aiming to grow at 25% over the next few years. To achieve this strategy, the bank has major hiring plans this year. The bank plans to recruit more than 27,000 people this year. Of this 20,000 – 22,000 people will be in the clerical post while 5,500 people will be at probationary officer level. Besides this the bank plans to go for lateral hires at middle management level. As part of its rural strategy, the bank aims to deploy around 2,000 probationary officers at its rural branches. The bank plans to open 1,000 branches this year bringing its total branches to 13,000 while it plans to scale up its ATM network to 25,000. While the higher loan growth may be achievable in the medium term, SBI's cost efficiency may be impacted.

According to a press release, telecom major Bharti Airtel will be buying a 70% stake in Warid Telecom. This company is the fourth largest telecom company in Bangladesh with a subscriber base of 2.9 m. Bharti will be making an investment of Rs 13.7 bn in the company for the stake. This capital infusion is expected to be used for funding network expansion and introduction of innovative products and services. The acquisition will be partly through the issue of fresh shares and partly through the acquisition of existing shares of the current promoters, the Abu Dhabi group. The Abu Dhabi group will continue to hold the remaining 30% stake in Warid Telecom. This acquisition is seen as a part of Bharti's strategy of expanding its international operations. However, we do not expect this acquisition to have a significant impact on Bharti's performance in the near term.

Small caps buck the trend
11:30 am

The Indian stock markets made several attempts to rise above the dotted line during the previous two hours of trade but to no avail. The indices, however, managed to pare some of the early losses on account of buying activity witnessed in the stocks from IT, telecom and healthcare sectors. However, currently stocks from the banking, realty and capital goods sectors are weighing heavily on the indices.

The BSE Sensex and the NSE Nifty are trading in the red, down by 50 points and 25 points respectively. The BSE-Midcap is trading down by 0.3%. However, small cap stocks have managed to buck the trend. The BSE-Smallcap is trading up by 0.2%. The rupee is trading at 45.68 to the dollar.

As per a leading business daily, Indian FMCG major ITC is planning to revamp its incense sticks (agarbatti) business. For this, it has signed an MoU with Infrastructure Leasing and Financial Services (IL&FS) to implement Tripura government's incense sticks project. Under this project the government aims to develop clusters for manufacturing incense sticks state-wide. ITC will be responsible for marketing these incense sticks under its flagship brand 'Mangaldeep' or one of its variants. The company has also signed another deal with Cane and Bamboo Technology Centre in Guwahati for a similar venture in other north-eastern regions. The highly diversified company entered this Rs 18 bn business in 2004. It marketed and distributed incense sticks under the ‘Mangaldeep’ brand which ranks second in the market, just after the Cycle brand. With the latest initiatives the company aims to ramp up its incense capacity by at least 50% in the next couple of years.

According to a leading business daily, state-run IDBI Bank is looking to merge with a private sector bank for which it has completed the due diligence. While the time-frame of the merger is yet to be decided, the bank hinted that the merger will take place in the short term. It may be noted that IDBI Bank, though one of the smaller public sector banks, is not a candidate for merger under the government's public sector banks consolidation scheme. At the time of conversion of IDBI into a bank, it was assured that the new entity (IDBI Bank) would not be merged with another bank. Moreover, the government has recently hinted that it will favour synergy-based consolidation in the public sector.

The merger target for IDBI Bank is yet to be disclosed. However, a good consolidation will aid the bank in gaining scale which it might need to compete with other private and public sector banks. It is worth noting that IDBI Bank acquired United Western Bank in 2006, but some human resource related problems are yet to be resolved. Hopefully, the bank should be better prepared for such things this time. Meanwhile, the bank sees some pick up in credit growth and expects to meet its credit growth target of 20% for the current fiscal. IDBI Bank is trading in the red along with other peers in the banking space.

India reflects weak Asia
09:30 am

Carrying on with yesterday's weakness, Indian markets have opened today on a weak note. The benchmark indices opened below the breakeven mark and have not managed to break into the positive territory since then. Asia is currently trading in the red with Hong Kong (down 2.4%) leading the pack of losers. The US markets closed lower by 0.3% 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 around 70 points, while the NSE-Nifty is down by around 15 points. Selling is being witnessed among mid and small-cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading lower by 0.3% and 0.2% respectively. The rupee is trading at 45.67 to the US dollar.

Auto stocks have opened the day on a mixed note. Gainers here include Bajaj Auto and Maruti Suzuki. However, TVS Motor is in the red. Bajaj Auto announced its December 2009 quarter results yesterday. The company's topline grew by 57% YoY during the quarter. This was on the back of a strong 64% YoY growth in volumes. The company was able to sell 72% more number of motorcycles than it had sold during the same quarter last year. This was significantly higher than the industry growth rate of 32%, thus enabling the company to increase its market share to 27% from 22% in 3QFY09. Operating profits jumped by 137% YoY as the company achieved record operating margins of 22% during the quarter. While the quarter witnessed an increase in cost of raw materials and components on a sequential basis, greater economies of scale and effective cost management enabled Bajaj Auto to maintain margins. With depreciation charges remaining benign and extraordinary losses coming in lower as compared to same quarter last year, the company has managed to nearly triple its net profits during 3QFY10.

Software stocks have opened the day on a strong note. Gainers here include Infosys and Satyam. As per a leading business daily, Infosys has revised its hiring target for FY10 to 24,000 people, from 20,000 earlier. The company is looking at more of local hiring given the continuing problems with H1-B visas. It will also serve staffing requirements from new acquisitions to be made this year. The company is also looking at parking about Rs 55 bn in mutual funds out of its current cash reserves of Rs 140 bn. Infosys expects spending in the telecom sector to pick up due to network expansion and emphasis on application stores. However, risks remain in the form of currency movement and dependence on large customers. Overall, the company is likely to benefit from the ongoing economic recovery.

Has the stimulus withdrawal begun?
Pre-Open

Yes, at least as far as China is concerned. Yesterday, the dragon nation raised the minimum reserve requirement for its banks by 0.5%. The move is an attempt to stop inflation in its tracks and prevent formation of big asset bubbles.

India too is expected to follow suit. RBI has been concerned with rising food prices and its impact on overall inflation for quite some time now. It is also mindful of the abundant liquidity in the system, thanks in part to its own relaxation of reserve requirements early last year and in part due to surging capital inflows into India. The fact that the Indian industrial output grew at its fastest pace in more than two years in the month of November 2009 also allays any fear with respect to economic slowdown. Thus, the stage seems to be perfectly set for the country's central bank to at least hike reserve requirement if not interest rates in the soon to be held monetary review exercise.

However, we wonder whether such measures would help both the nations achieve desired results unless the developed nations, most of all the US follows suit. And such a possibility looks remote indeed. US unemployment is still nowhere close to comfortable levels and this is the single most important factor that would force the US Fed to continue with its loose monetary policy. Thus, cheap money emanating from the US will continue to look for higher yields and risky asset classes like Indian and Chinese equities.

This scenario also presents a dilemma for Indian investors. It is quite possible that continued surge in capital inflows could take stock markets even higher. But investors fall for this buoyancy at their own peril. It should be noted that that risk reward equation from a one to two year perspective is not that favorable at the current juncture and hence, please take the fundamentals of the underlying company and its valuations into proper account while investing. For if the capital flows start looking the other way, one does not want to be caught on the wrong foot!

The oil that could give Saudi Arabia a run for its money
Commodities is an interesting space. And crude oil even more so. Reduce supply by a couple of million barrels per day and prices could skyrocket. And it works the other way as well. Increase supply by the same amount and prices could well cool down considerably. Now, imagine a region having Saudi Arabia like reserves being bought into play over the next few years. We are talking about oil ravaged Iraq. As per CNN Money, the country's oil industry is on the verge of a major reconstruction and could start pumping as much as 11 million barrels per day, a number that is just behind Saudi Arabia and Russia, within the next few years.

Forget 11 million barrels, even if it manages to achieve a steady supply of a mere 20% of that amount, it can have a major impact on crude oil prices. However, it looks unlikely that OPEC would let Iraq spoil the oil market. Furthermore, depressing prices more than required would also hurt Iraq's own interests. At best, what we can hope for is reduced volatility in oil prices.