Banks drive indices to strong finish
Closing

After a weak opening, strong buying activity in the index heavyweights propelled the indices to stay well above the dotted line throughout the day. Although profit booking was witnessed at higher levels, the indices managed to hold on to their gains and close well into the positive. While the BSE Sensex closed higher by around 87 points (up 0.5%), the NSE Nifty gained around 23 points (up 0.4%). Midcap and smallcap stocks also registered gains of 0.6% each. While banking and auto stocks led the pack of gainers, healthcare and metals stocks were at the receiving end.

As regards global markets, Asian indices closed mixed today while European indices have also opened on a mixed note. The rupee was trading at Rs 45.66 to the dollar at the time of writing.

Software stocks closed firm today led by TCS, Wipro and Infosys. Software major TCS announced its 3QFY10 results late Friday. The company’s net sales grew by 3% QoQ in 3QFY10. This was largely aided by a 6.6% QoQ increase in volumes. The major growth driver was the banking and financial services (BFS) segment, which contributed around 45% to TCS' consolidated revenues. Operating margins expanded by 1.2% QoQ during the quarter, largely on account of better utilization and cost containment. Aided by better margins and higher other income, net profits rose by 11% QoQ during the quarter. Profit growth for 9mFY10 stood at a robust 27% YoY. TCS added 32 new clients and 7,692 employees (net) during the quarter. Attrition rate stood at 11.5% at the end of 3QFY10 (as against 11.4% at the end of previous quarter).

Pharma stocks closed mixed today. While Glenmark and Piramal Healthcare found favour, Dr.Reddy’s and Sun Pharma closed in the red. Glenmark closed 2% higher today. Infact, the stock price has doubled since the rally began in March 2009. Having said that, 2009 was not particularly a good year for the company as the global economic slowdown had an adverse impact on its business, especially during the last two quarters of FY09. Setbacks in its R&D programme also did not help matters. Discontinuation of research on one molecule out-licensed to Eli Lilly and negative results with respect to its lead compound 'Oglemilast' out-licensed to Forest Laboratories were the setbacks that Glenmark had to contend with. Having said that, the company still has a strong R&D pipeline as compared to its peers and prospects are expected to improve going forward as various businesses pick up.

Axis Bank announced its 3QFY10 and 9mFY10 results on Friday. The bank’s net interest income rose by 11% YoY during 9mFY10 on the back of 13% YoY growth in advances. Net interest margins (NIM) moved up to 4.0% in 9mFY10 from 3.1% in 9mFY09. With a higher proportion of CASA, the differential in lending and borrowing rates aided the improvement in the bank’s NIMs. The management believes that the same may not be sustained going forward as the cost of funds rise and the bank’s leverage increases. Net profits grew by 42% YoY backed by strong traction in other income (up 47% YoY), despite higher provisioning. Net NPA to advances was marginally higher at 0.5% at the end of 9mFY10 as against 0.4% in 9mFY09. The management believes that the NPA and restructured assets have already peaked in FY10 and unlikely to show significant slippages going ahead. Capital adequacy ratio (CAR) was higher at 16.8% at the end of 9mFY10 after capital raising in 2QFY10. The bank closed higher today.

Banking, auto push markets higher
01:30 pm

The Indian markets continued to trade on a strong note during the previous two hours of trade. Currently, buying activity in sectors like banking and auto is helping markets stay in the positive. However, metal and realty sectors are finding it difficult to garner investors’ interest.

The BSE Sensex and NSE Nifty are trading in the positive, up by 120 points and 30 points respectively. Midcap and small cap stocks are also trading in the positive, up by 0.5% and 0.9% respectively. The rupee is trading at 45.59 to the dollar.

Ultratech Cement announced its 3QFY10 results recently. Its topline grew by merely 1.3% YoY. The growth was largely backed by a double digit growth in volumes. Operating profits declined by 10.9% YoY as costs continued to grow at a faster rate as compared to sales. A poor show at the operating level boiled down to the bottomline causing net profits to decline by 17.8% YoY. Further, the board of the company has approved the amalgamation of Samruddhi Cement Ltd and has also approved a share exchange ratio of 4 equity shares of face value of Rs 10 each for every 7 shares held in Samruddhi Cement of face value of Rs 5 each.

The demand for cement is expected to grow at the rate of 10% backed by government’s initiatives to boost rural, housing and infrastructural development. However, upcoming capacities have started exerting pressure on realisations. The planned new capacities are in the various stages of commissioning, which upon becoming operational will certainly result in downward pressure on margins. The industry is likely to witness excess capacity scenario over the next 18 to 24 months. Thus, going forward, those companies that are able to control costs better will have the competitive advantage.

As per a leading business daily, Power major NTPC's proposed joint venture with Nuclear Power Corporation of India (NPCIL) for setting up a 2,000 MW atomic power plant is likely get an approval from the Department of Atomic Energy (DAE) within the next 2 to 3 months. It may be noted that NTPC and NPCIL signed a Memorandum of Understanding (MoU) to form a JV for setting up nuke power projects in the country in December 2009 and are now awaiting approval. NTPC plans to add 2,000 MW of nuclear power by 2017. NPCIL will hold a majority stake of 51% while 49% will be held by NTPC. NTPC has formed a Nuclear Power Cell headed by officers trained at Bhabha Atomic Research Centre (BARC) for building capacity in this field. The company’s forays into nuclear energy are in line with its long term strategy of raising its capacity to 75,000 MW by 2017 through a mix of thermal, hydel and nuclear power. The stock of NTPC is currently trading flat.

Persistent buying aids indices
11:30 am

After witnessing a weak start, the Indian stock markets managed to break into the positive during the previous two hours of trade. The markets moved northwards on account of buying activity being witnessed across banking, capital goods and auto stocks. However, realty, oil & gas and metal stocks are unable to garner investors' favor.

The BSE Sensex and NSE Nifty are trading in the positive, up by 90 points and 20 points respectively. Midcap and small cap stocks are also trading in the positive, up by 0.5% and 0.9% respectively. The rupee is trading at 45.69 to the dollar.

According to a leading business daily, Indian renewable energy major Suzlon, is aiming to clean up its balance sheet by getting its Rs 86.5 bn loan restructured. The debt-laden company is in talks with its lenders like SBI, BoB, IDBI etc so as to convert its existing rupee loans into long-term maturity loans. If the banks approve this proposal, the company will see a significant reduction in cash outflow in the medium term. Its interest cost will decline and overall annual cash savings of around Rs 10 bn can be expected. It may be noted that the company is serving a debt of Rs 105 bn which requires an interest charge of Rs 11 bn annually.

The company has recently repaid US$ 780 m debt on back of the proceeds it generated from the 35% stake sell in its Belgium subsidiary, Hansen Transmission and a new five-year loan of US$ 465 m from SBI. The company has hinted that it is planning to sell its remaining 26% stake in Hansen Transmissions in order to raise more funds. After the restructuring the company plans to focus more on its German subsidiary, REpower where the company owns 90%. REpower wins the maximum overseas orders for Suzlon. The company even aims to acquire the balance 10% stake in this German subsidiary. We believe that the company which is seeing a pickup in demand in its key markets of the US and Europe, needs to do something very soon in order to strengthen its balance sheet, if it plans to remain in this competitive business.

Balaji Telefilms announced its 3QFY10 results last week. The woes continued for the company as it saw a topline decline of 22% YoY on account of a fall in both hours of programming and average realisations per hour. The operating profit margins turned negative despite reduction in expenses and the share of other income declined by 30%. The company's profit before tax plummeted by 95% YoY during 3QFY10 due to a decline in the topline and erosion in operating margins. The company's profit after tax nosedived by around 220% YoY. We believe that the company's stronghold on the soap category has been eroded by the successful entry of several content providers.

The niche that Balaji enjoyed on Star has also ended. The company's foray into new genres and broadcasters has also not been able to generate the traction it had in its early years, when it came out with several soaps one after the other. In fact, it had to pull out several soaps even in 3QFY10. As such there is very little visibility on the earnings front for the company. The spate of write-offs in debtors, fixed assets and investments and legal troubles tell the tale of hard times the company has fallen into.

India begins on a weak note
09:30 am

The Indian markets have started on a weak note. The benchmark indices opened above the breakeven mark but quickly fell into the negative territory. They have not managed to fight back since then. Asia is currently trading in the red with Japan (down 1.8%) leading the pack of losers. The US markets also closed lower by 0.9% last Friday.

Currently, in India, heavyweights from the BSE-Sensex are trading a mixed bag with software, auto and banking stocks witnessing buyers' interest. However, select metal and cement heavyweights are in the red. The BSE-Sensex is trading lower by 17 points, while the NSE-Nifty is down by 15 points. However, buying interest is being witnessed among mid and small-cap stocks as the BSE-Midcap and BSE-smallcap indices are trading higher by 0.2% and 0.5% respectively. The rupee is trading at 45.73 to the US dollar.

Engineering stocks have opened the day on a strong note. Gainers here include Engineers India and Thermax. As per a leading business daily, L&T has decided to put its heavy engineering special economic zone (SEZ) project near Surat on hold. The company had planned an SEZ for heavy engineering at Suvali and Mora in Surat district. The SEZ was to come up over an area of 100 hectares. It entailed an overall investment of around Rs 40 bn. The project has apparently been put on hold due to sluggishness in the export markets. Interestingly, L&T is not alone in having second thoughts about its SEZ projects. SPG Infrastructure, Indian Steel Corporation, Gujarat Growth Centre Development Corporation, DLF and Parsvnath have also either withdrawn or deferred their SEZ plans. In our view, this is another example of a corporate fad eventually facing the harsh reality of economics.

Refinery stocks have opened the day on a strong note. Gainers here include MRPL and HPCL. As per a leading business daily, HPCL plans to set up a refinery in the Konkan region. The plant will have a capacity of processing 9 to 15 m tonnes per annum of crude. The company will invest about Rs 200 bn for the project. It is likely to come up on about 2,000 acres either in the Raigad or Ratnagiri district of Maharashtra. HPCL plans to fund the project with a debt equity ratio of 1:2 or 1:2.5. In our view, this refinery can be viewed as a natural extension of the company's Mumbai refinery. However, given the fact that HPCL has to sell fuels below their cost, financing such huge capital expenditure will require some serious effort.

What can spook IT's party in 2010?
Pre-Open

As we move into the third full week of 2010, the third quarter results of India Inc. are set to intensify. This is after the previous week that belonged to the IT majors Infosys and TCS. Both these companies announced decent numbers for their third quarter. What is more, both the managements talked with greater optimism about the future than they did a quarter or two ago.

There is no denying that the outlook for IT companies has improved over the past few months. Global IT spending is expected to increase by 3.3% during 2010. This is after it saw a 3.6% decline in 2009. IT services spending in particular is expected to grow by 4.5% during this year. This will bode well for the Indian IT industry as well. In fact, the industry regulator Nasscom also sees an uptick in IT demand. It expects the industry to register a double-digit growth during the coming fiscal i.e., FY11.

So all seems to be going well for the sector as of now.

However, the spoke in the wheels for the sector's future performance, as both Infosys' and TCS' managements recently agreed, is currency volatility. With the rupee rising against the US dollar on the back of rising foreign inflows into India, IT companies are sure to take some hit on their margins going forward. And this remains a key risk.

But the way IT stocks are behaving now, it seems investors are again getting comfortable with risk taking. And they seem to be neglecting the rupee's constant rise. A run-up that began last April has brought most frontline stocks at nearly their all-time highs. In fact, P/E multiples of most of these stocks are already at multi-year highs.

We suggest that investors must get somewhat cautious with respect to their exposure to IT stocks. This is especially considering that a lot of good news is already priced into the valuations. Of course, one can still find and invest in a good quality IT company selling at low valuations. But that's become a tough task these days.