Strong selling bout hurts indices
Closing

While the larger part of today’s session saw the indices oscillate to either side of yesterday’s close, selling activity intensified in the later hours causing the indices to close well into the red. While the BSE Sensex closed lower by around 155 points (down 1%), the NSE Nifty lost around 51 points (down 1%). Midcap and smallcap stocks were also at the receiving end losing 0.7% and 0.6% respectively. Losses were largely seen in IT, healthcare and energy stocks.

As regards global markets, Asian indices closed mixed today while European indices opened in the red. The rupee was trading at Rs 45.68 to the dollar at the time of writing.

As per a leading business daily, NTPC is planning to sell a part of its electricity output at market rates to bolster revenues going forward. It must be noted that at present, the state run power company is required to sell 85% of its output to state electricity boards under long-term agreements. The remaining 15% is given to power-deficit states under the discretion of the power ministry. But this scenario could change if the government allows NTPC to sell the unallocated quota as merchant power.

NTPC is looking to set up a merchant power capacity of about 6,000 MW by 2017. Since this capacity will be of a merchant nature, the electricity produced by these plants would be sold on auction to the highest bidder, as opposed to a particular buyer through a power purchase agreement (PPA). As a matter of fact, while the company currently sells power at an average cost of Rs 1.6 per unit to state electricity boards, it hopes to get between Rs 5 and Rs 6 per unit from the sale of power from these merchant plants, especially during peak hours. However, we believe that this business is expected to form not more than 5% to 7% of the company’s total revenues going forward. The stock of NTPC closed lower today.

MNC pharma stocks closed mixed today. While Aventis found favour, Novartis and GSK Pharma closed weak. Novartis closed lower by 3% today and this was the fallout of poor 3QFY10 results announced by the company a short while ago. During the quarter, the company’s revenues grew by a subdued 7% YoY and were largely led by the pharmaceutical and animal health businesses. Revenues from the pharma division, which accounts for 71% of total sales, grew by 9% YoY. The robust 28% YoY growth in the animal health division could be attributed to various marketing initiatives undertaken by the company. However, revenues from the generics division fell sharply by 52% YoY. This was mainly due to the one-time government tender business for the anti-TB range in 3QFY09 which was not present this quarter. Operating margins fell by 1.3% to 15.6% due to higher staff costs and other expenditure (as percentage of sales). Fall in operating profits and reduction in other income meant that the bottomline declined by 4% YoY during 3QFY10.

As per a leading business daily, engineering major L&T is contemplating borrowing as much as US$ 4.4 bn to build a power generation business. Further, plans on the anvil also include buying coal mines in Australia and Indonesia to gain fuel supplies. Obviously, the company is looking to capitalise on the power generation opportunity given the acute power shortages that India has been facing. Infact, peak-hour shortages were as high as 12.6% this year. However, L&T already has a high amount of debt on its books. This was amply evident during 2QFY10 when interest costs surged by 61% YoY. What is more, interest costs for the first half of this fiscal had substantially increased by 83% YoY. The stock closed lower today, while its peers Voltas and BHEL closed firm.

Midcaps and smallcaps buck the trend
01:30 pm

After witnessing a weak start, the Indian stock markets remained muted during the previous two hours of trade. Despite several attempts to touch the breakeven line, the markets have not yet managed to break into the green. Currently, stocks from the IT, telecom, healthcare and auto sectors are trading weak, while stocks from the consumer durables, banking and metal sectors are finding favour.

The BSE Sensex and NSE Nifty are trading in the red, marginally down by 12 points and 4 points respectively. However, midcap and small cap stocks have managed to buck the trend. The BSE-Midcap and BSE-Smallcap are trading up by 0.5% and 0.8% respectively. The rupee is trading at 45.58 to the dollar.

According to Fitch, the global rating firm, the Indian auto sector is expected to grow by 10-12% in revenues in 2010 on the back of decent domestic and overseas demand. However, the credit rating agency in its 'Indian Auto Sector Outlook' indicated that Indian automakers will witness pressure on margins on account of high competition in the sector. With the increasing penetration of global original equipment manufacturers (OEMs) and a plethora of new players entering the lucrative Indian small car segment, the competition is bound to intensify.

It may be noted that many global OEMs are setting up shops in India, either independently or as joint ventures with the existing players in order to leverage their established distribution networks. The segment leaders like Maruti Suzuki, Tata Motors and Hyundai Motor India are expected to find a tough time guarding their market shares. Apart from increase in competition, this inundation of automakers and OEMs is expected to result in under-utilisation of capacity in the medium term on back of mismatch in demand and supply.

HT Media declared its 3QFY10 results yesterday. The company increased its topline by 5.9% during 3QFY10 on the back of higher circulation revenues. The operating profit margins increased from 6.3% to a whopping 20.3% on account of better pricing, lower newsprint costs and cost rationalisation. This, despite the higher tax outgo and lower other income, made the bottomline turn positive during the quarter. The net profit margin stood at a decent 9.6% at the end of 3QFY10. During 9mFY10, topline increased by 3.6% YoY while bottomline turned positive. It may be noted that the company has invested around Rs 1.5 bn in its Mumbai press inorder to increase its presence in the Mumbai markets. It has capex plans of Rs 1.25 bn for the fiscal, out of which about Rs 400 m will go towards the Burda joint venture. The company expects to break even on the radio segment by the end of FY10, while EBITDA level losses in the internet business are expected to be around Rs 480 m.

Markets slip into the negative
11:30 am

After a shaky start, the Indian markets have slipped into the negative territory during the previous two hours of trade. Stocks from the realty and IT sectors are the ones witnessing overall declines, while consumer durable, metal and banking stocks are garnering buying interest.

The BSE-Sensex is trading lower by around 60 points, while the NSE-Nifty is trading lower by 20 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 0.4% and 0.7% respectively. The rupee is trading at 45.62 to the US dollar.

IDBI Bank announced its results yesterday. Its interest income grew by 36% YoY in 9mFY10, on the back of 21% YoY growth in advances. The bank's capital adequacy ratio stood at 11.5% at the end of 9mFY10. Net interest margins were higher at 1.2% from 1% in 9mFY09 despite a lower CASA proportion. However, its net NPA to advances came in higher at 1.4% in 9mFY10 from 1.3% in 1HFY10. Its cost to income ratio shrank from 49% in 9mFY09 to 37% in 9mFY10. Net profit margins dropped by 0.2% YoY in 9mFY10 due to higher provisioning costs. IDBI Bank has managed to outperform the sector average by clocking nearly 21% YoY growth in advances in 9mFY10. Further, in doing so, the bank has paid heed to margins which have improved over the quarters, albeit marginally.

IDBI has indeed been particularly aggressive in growing its retail advance portfolio, which has grown at a faster clip than that in most PSU banks, although on a lower base. Our biggest concern for IDBI Bank has been its poor provisioning policy. The same has come to the fore in terms of impacting the bank's performance at a time when its margins are on an upward trend. IDBI Bank's net NPAs have sequentially increased in the past three to four quarters to 1.4% in 9mFY10. The bank's provision coverage, has however, fallen from 50% in FY08 to 33% in 9mFY10. This is half of RBI's mandate of 70% coverage by 1HFY11 and lies way below that of its peers. Going forward this will entail substantially higher provisioning that will take away the bank's cost advantage due to its lean structure.

Shriram Transport Finance (STF), the country's largest asset financing NBFC (non-banking finance company), also announced its results. Its interest income grew by 20% YoY in 9mFY10 on the back of 24% YoY growth in assets under management (AUM). Net interest margins dropped to 6.9%, from 7.4% in 9mFY09; with increased pressure on loan yields. Incremental lending skewed towards used vehicles. Other income fell by 18% due to lower proportion of income from securitisation. Net profits grew by 33% YoY in 9mFY10 aided by lower operating costs. The company's net NPA ratio declined from 0.8% in 1HFY10 to 0.7% in 9mFY10.

India reflects choppy Asia
09:30 am

The Indian markets have started today on an uncertain note. Taking cues from the Asian markets, benchmark indices here have struggled to cross the breakeven mark. Asia is currently trading a mixed bag with Indonesia (up 0.4%) leading the pack of gainers. The US markets remained closed yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading a mixed bag with metal and power stocks witnessing buyers' interest. However, select auto and banking heavyweights are in the red. The BSE-Sensex is trading higher by around 15 points, while the NSE-Nifty is flat. However, buying interest is being witnessed among mid and small-cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.7% and 0.8% respectively. The rupee is trading at 45.64 to the US dollar.

Energy stocks have opened the day on a mixed note. Gainers here include Gujarat Gas and Castrol. However, ONGC is in the red. GAIL announced its 3QFY10 results yesterday. The company reported a topline growth of 6.7% YoY during 3QFY10 on the back of a 45% YoY growth in the natural gas transmission business. Sales from the petrochemicals segment grew by 29% YoY, while LPG & liquid hydrocarbon segment grew 113% YoY. EBITDA margin expanded to 20.7% during the quarter from 4.6% in 3QFY09 on the back of lower raw material costs. Petrochemicals gross margins expanded from 27% in 3QFY09 to 48% this quarter. Natural gas transmission margins increased by 8%. Other income recorded a decline of 45% YoY during the period. Bottomline zoomed by 239% YoY during 3QFY10 due to the strong recovery in operating margins.

Steel stocks have opened the day on a strong note. Gainers here include Tata Steel and SAIL. As per a leading business daily, Tata Steel along with South Africa's Sasol Synfuel International has proposed to set up India's first project to convert coal into liquid in Orissa. The 3.6 m tonnes per annum project will require an investment of Rs 450 bn. Coal for the project would be procured form Srirampur area in Talcher district. The project is slated to commission in 2018 and will produce 80,000 barrels of liquid fuel per day. In our view the crucial issue will be land acquisition. The project requires 3,000 acres of land. It may be noted that two other mega investments in the state - steel plants by ArcelorMittal and Posco - have already been plagued by land acquisition issues.

To exit or not to exit
Pre-Open

With inflation in India charting an upward path, the RBI is toying with the idea of withdrawing the economic stimulus. But the task is indeed challenging. In fact, the RBI governor Dr. Subburao has said that timing the removal of stimulus is a challenge. He said, "The challenge for the RBI is to support the recovery process without compromising on price stability."

India had introduced stimulus measures as the global recession intensified. As reported on Bloomberg, this amounted to more than 12% of GDP between September 2008 and April 2009. This was largely instrumental in helping the economy grow 7.9% in the September 2009 quarter, the fastest pace in more than a year. Not just that, despite a lower growth in GDP in FY10, India was still touted to be one of the fastest growing economies in the world. This obviously increased its attractiveness as an investment destination to foreign investors. These investors poured large sums of money into the India stockmarkets. As a result, the indices surged at a time when inflation was already rearing its ugly head.

Thus, all fingers now point to an imminent hiking of interest rates. After all, while food prices have shot up, the inflation index has revealed a rise in prices of non-food items as well. What is more, just recently China's central bank raised the reserve requirements. This was to check price gains and asset bubbles giving the impression that India is also likely to follow suit. Even if the RBI chooses not to tamper with the rates now, it will not have much choice in this regard in the subsequent quarters. Especially, if food prices refuse to cool down!

IMF wary of exiting stimulus
Speaking of exiting stimulus measures, the IMF chief Dominique Strauss-Kahn is of the opinion that some countries may suffer double-dip recession. This will be especially so if they exit strategies taken to deal with the global financial crisis too early. What the governments need to take into account is the recovery in private demand and the rate of unemployment. Only if these turn out to be favourable then the decision to withdraw stimulus measures carries weight.

This has certainly not been the case at least in the advanced economies of US and Europe. These are grappling at present with an unemployment rate as high as 10%. This has obviously had an impact on demand conditions as well. According to the IMF chief an early exit from stimulus measures could backfire. Why? Because countries may not be able to find new tools to deal with a renewed downturn. This is especially after using both fiscal and monetary stimulus measures to tackle the crisis. But predicting the right timing for the exit is very tricky. And even if that dilemma gets resolved favourably, governments will then have to focus their attention on the next equally important problem - reducing the fiscal deficit. Indeed, there are some tough decisions that central bankers and governments around the world will have to take to guide the global economy on its path to recovery.