Energy heavyweights prop up markets
Closing

Backed by strong contribution from heavyweights such as Reliance and ONGC, markets maintained their positive momentum during the closing hours and managed to end the day comfortably in the green. While BSE Sensex edged higher by around 75 points (0.4%), NSE Nifty eked out gains of around 30 points (up 0.5%). However, the show stealers were once again the BSE Midcap and Small cap indices which gained by 0.9% and 1.2% respectively. Apart from oil & gas heavyweights, metal bellwethers like Tata Steel and Sterlite also contributed to the overall gains. The advance to decline ratio though was evenly split amongst the Sensex universe.

Asian indices were also in buoyant mood today as barring Hang Seng, all of them closed the day in the green. Europe is also witnessing strength currently. The rupee was trading at Rs 45.6 to the dollar at the time of writing.

Buoyancy in oil and gas as well as metals heavyweights once again seems to be pointing towards the fact that economic recovery is well and truly underway and at some point in time, investors are expecting greater inflation to show itself up. Moreover, some India specific articles that are doing the rounds are also having their impact on the energy and metals counters. Case in point being a Bloomberg story that quotes the President of Asian Development Bank and adds that growth in Asian economy could increase to 6.6% in the year 2010 as compared to 4.5% in 2009, obviously with a fair degree of help from India. Thus, higher growth in India would in turn boost demand for basic materials like crude oil and metals and hence the interest in these counters. Looks like one by one, the bears are slowly going into hibernation.

Indian pharma companies that were burdened by the foreign exchange losses on their overseas borrowings last fiscal seem to have learnt a lesson. As per a leading daily, the companies have reduced their cumulative foreign currency convertible bond (FCCB) burden by over 60%. This has helped the companies improve their financial health and look for further fund-raising for expansions. The drug companies, which raised over US$ 2 bn (around Rs 100 bn) during FY08 to fund acquisitions and capital expansions, have now reduced the FCCB outstanding to US$ 840 m. Most of the reduction was thanks to the relaxation of norms by the RBI to allow buyback of the issued bonds on or before December, 2009. This was a measure to help them tide over the global financial meltdown particularly in terms of the mark-to-market (MTM) losses. Pharma stocks closed a mixed bag today with Dr. Reddy's and Wockhardt ending in the positive.

Oil marketing companies are expected to finally recover some of their losses in cash. As per the oil ministry, PSU oil companies may get cash instead of oil bonds as compensation from the government for selling fuel at below market prices. While no decision had been taken on the quantum of compensation, the ministry had earlier sought Rs 200 bn worth of bonds for state-run firms as compensation for the current fiscal. The government has been issuing bonds to cover losses of PSU oil refiners. In FY09, the oil subsidy was Rs 756 bn as high global crude prices had inflated oil companies' losses. However, the oil bonds have swelled the government's fiscal deficit which is currently reigning at 16-year high. Stocks from this sector ended in the positive today with IGL, ONGC and Gujarat State Petronet being the lead gainers.

Bharti targets international markets
01:30 pm

Indian markets pared its gains in the last two hours of trade. Buying activity has been witnessed in the Oil and Gas and consumer durable space while stocks in the IT and FMCG space are trading in the red.

The BSE-Sensex and the NSE-Nifty have lost most of the opening gains. While trading above the dotted line, the BSE-Sensex is up by 26 points, the NSE-Nifty is up by 13 points. BSE-Midcap Index is trading up by 52 points while the BSE-Smallcap index is up by 110 points. The rupee is trading at 45.46 to the US dollar.

With the Indian mobile phone market getting more competitive, Bharti Airtel has shifted its focus to the international markets. The company has moved its current CEO Mr. Manoj Kohli to its newly created international division to spearhead its global play. This move signals the company's renewed focus on the International markets and an indication of the company's business outlook. Mr. Kohli was instrumental in Bharti's meteoric rise. We believe that he has been placed in the international division so that he can replicate the domestic success internationally. In the coming days, we are likely to witness a surge in the company's investment in emerging markets. Mr. Kohli has been replaced by Mr. Sanjay Kapoor who held the post of the deputy CEO in the company.

One of the top losers in the market today is HUL. The company had been suffering from the loss of market share over the last few quarters. This resulted in the stock sitting out of the consumer goods stock rally. Moreover, according to a leading daily, the December quarter has seen a lower consumer offtake as compared to the corresponding period last year. This slow down comes on the back of rising commodity prices which has forced households to adjust their expenses on consumer goods. The category which has witnessed the biggest slowdown is soaps and detergents. HUL derives a majority of its revenue from this segment. Furthermore, higher advertisement spending has put pressure on the company's margins. We believe HUL's results could be subdued this quarter

Union Bank up on overseas plans
11:30 am

After witnessing a strong start, the Indian stock markets remained relatively upbeat during the previous two hours of trade. However, the indices pared some of the opening gains on account of profit booking in the telecom and FMCG sectors. Currently, persistent buying activity is being witnessed in sectors like oil & gas, realty, metal and banking which has kept the indices well above the dotted line.

The BSE Sensex and the NSE Nifty are trading in the positive, up by 60 points and 25 points respectively. Midcap and small cap stocks are also trading in the positive, up by 1.01% and 1.4 respectively. The rupee is trading at 45.55 to the dollar.

As per a leading business daily, Mumbai based pharma major Wockhardt has won USFDA's tentative approval to market 'Levofloxacin', a generic used for treating a broad spectrum of bacterial infections. The company will be able to market this drug in the strengths of 250 mg, 500 mg and 750 mg in the US. It may be noted that according to estimates this widely used drug has a potential market of US$ 1.6 bn. It is currently marketed in the US by Johnson & Johnson which holds a patent which will expire in June 2011. Wockhardt plans to launch this drug immediately after the expiration of the patent. The company has won a couple of tentative approvals from US FDA since the start of this year. We believe these FDA approvals will help the company augment its product portfolio and bolster sales from the highly competitive US generics market.

However, the company still has a lot of issues to resolve in terms of its balance sheet debts and FCCBs. The latter especially has been a persistent woe for the company. More so when the other pharma companies have been able to reduce their cumulative FCCB burden by 60%, giving them better financial stability and more avenues for funding expansions. Currently the stock is trading in the green.

According to a leading business daily, state-owned Union Bank of India is in talks with a couple of small Indonesian banks for potential acquisitions. The bank's board has approved its strategies for overseas acquisitions probably in geographies like Indonesia, Africa, Europe and the UK. However, with Indonesian banks, talks are in the preliminary phase as of now. The bank will have to seek regulatory nods from RBI and Indonesian banking regulators once it identifies the target for acquisition. The bank's overseas acquisition strategy aims at assisting Indian entities operating in the target geographies. It also aims at facilitating trade financing and offering retail banking services to local clients there. It may be noted that at present the bank's overseas presence is limited in Hong Kong, where it has a full-fledged branch. It also has four representative offices abroad.

We believe that going forward, with technological upgradation and aggressive growth strategies, the growth prospects of the bank appear enthusing. However, excessive reliance on treasury income and inability to grow its fee income base remain lingering concerns. The bank is trading in the green along with other peers in the banking space.

India begins in the green
09:30 am

The Indian markets have started on a strong note. The benchmark indices opened above the breakeven mark and have managed to stay in the positive territory since then. Asia is currently trading in the green with Japan (up 1%) leading the pack of gainers. The US markets also closed higher by 0.5% yesterday.

Currently, in India, heavyweights from the BSE-Sensex are trading a mixed bag with energy, metal and auto stocks leading the pack of gainers. However, the software heavyweights are in the red. The BSE-Sensex is trading higher by 96 points, while the NSE-Nifty is up by 31 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 1.1% respectively. The rupee is trading at 45.48 to the US dollar.

Tobacco stocks have opened the day on a mixed note. ITC has opened in the green, while VST Industries and Godfrey Phillips are in the red. VST Industries announced its 3QFY10 results yesterday. The company’s sales fell by 1% YoY during 3QFY10. The decline could be a result of restriction in smoking areas and the graphic warning which has been introduced on cigarette packs. Operating income fell by 17% YoY during the quarter due to increase in raw material and employee costs. However, it was offset by the foreign exchange gain during the quarter. Net margin fell by 3.3% due to lower operating profit and decrease in other income. As a result, net profit for 3QFY10 fell by 20.3% YoY.

Banking stocks have opened the day on a strong note. Gainers here include Union Bank and Central Bank. As per a leading business daily, banks are increasingly taking the outsourcing route to ramp up their ATM networks while conserving their resources. Banks such as SBI, Axis Bank and Central Bank are opting for this method. The cost of setting up and running the ATM is borne by the service provider while the bank pays a fee for every transaction. The bank continues to hold the licence and deploys its own cash. It may be noted that ATM transactions have grown by 40% after RBI allowed accountholders to access any ATM without any charge for five withdrawals up to Rs 10,000 per month. In our view, this is a positive development for the industry as it will help banks save capital expenditure, yet continue with their branding efforts.

Japan has 'steel'y ambitions in India
Pre-Open

Japanese investment in India is nothing new. A classic case is that of Japanese carmaker Suzuki Motor's stake in Maruti Suzuki, which sells half the cars bought in India. And so it should come as no surprise if Japanese steel makers are also planning to follow suit. At present Japan is beset with a host of problems not least of which is a shrinking domestic market and increasing competition. And so Japanese companies are looking to capitalise on growing steel demand overseas and India seems like the most likely choice. The reasons are not hard to find. Besides the fact that India is among the fastest growing among the emerging economies, a growing auto market, emphasis on building infrastructure by the government and new housing construction are some of the factors that will further bolster the rising demand for steel. And this seems to have increased India's attractiveness in the eyes of Japanese steel makers. What is more, as reported in the Wall Street Journal, CLSA expects steel demand to rise by 10% in FY12 and will pick up to 12% subsequently.

However, Indian steel makers are among the lowest cost producers in the world and for Japan to have a competitive edge it will have to invest in manufacturing capacities in the country if it wants to compete on a level playing field. Secondly, Japanese players may have to contend with a problem of oversupply which could arise if both Indian and Japanese players choose to increase capacities. Whatever be the case, Indian steel companies will have to gear up for some competition in the years ahead.

No respite on the deficit front
FY09 saw India's fiscal deficit zoom to 6.2% of GDP. This deficit is expected to widen to 6.8% of GDP in FY10. What with interest payments, salaries to government employees and subsidies eating away into its revenues and the government introducing stimulus measures to spur the economy, the surge in fiscal deficit is hardly surprising. Interestingly, as reported in the Wall Street Journal, the Finance Minister Pranab Mukherjee expects to cut fiscal deficit to 5.5% next fiscal year and then shrink it to 4% a year later. But this could prove to be challenging. For starters, what the government needs to focus on is the curtailment of expenditure (especially on the revenue front), a fact which has not been witnessed in previous fiscals and which seems unlikely in near future as well.

Ideally for an emerging economy like India, spending on social sectors such as education, agriculture and healthcare is of paramount importance. The problem is that while the Indian government may not curtail this spending, the strained fiscal position does not leave it much headroom to increase this spending either. Of course, tax revenues will provide respite but from a longer term perspective it will be important to reduce the expenditure by improving productivity and efficiency. Therefore, while the government's aim to bring this fiscal deficit down is certainly a step in the right direction, it remains to be seen how it chooses to go about it.