Engg. stocks lead Sensex's freefall
Closing

A weak set of numbers reported by India's largest engineering company, L&T, did not go down well with the markets, as they slid sharply in today's trade. Then, the markets also had to contend with China's clampdown on bank lending with a view to nip the emerging realty bubble out there. Interestingly, China was amongst the few gainers amongst Asian markets today.

Anyways, the BSE Sensex and NSE Nifty closed with losses of around 420 points (2.4%) and 125 points (2.4%) respectively. Mid and small cap stocks followed suit. The BSE Midcap and BSE Smallcap indices closed down by 2.4% apiece. On the broader BSE, just one stock gained today for every five that closed in the red.

Capital goods stocks were the worst performers today. The BSE-Capital Goods index closed lower by over 5%. Big losers here included heavyweights like L&T, Punj Lloyd, Siemens, and BHEL. A poor set of numbers from L&T spoiled the mood on the street. For the quarter ended December 2009, L&T reported a 6% YoY decline in its net sales. Net profit (before extraordinary items) managed a 15% YoY growth owing to improved operating margins. The company has cited slow execution of some contracts and delayed financial closure as the key reasons for the drop in topline during the quarter. The company also deferred release of some high value orders, which affected sales during the quarter. This has led to the company lowering its full-year FY10 growth estimate to 10% from 15% earlier, which seemingly soured markets' sentiment. The management has however indicated of better times in the future.

We are not shocked to see such a performance from L&T, given that the Indian economy is still to see the full effects of a worldwide economic slowdown. And this is especially considering that the impact is felt by the capital goods sector with a lag. India's infrastructure investments are anyways prone to execution issues, and this we believe can pose as the biggest constraint to our economic future.

Banking stocks also felt the heat of today's selling wave. The BSE-Bankex closed down by 2.4%. Major losers here included Kotak Bank, Yes Bank, and ICICI Bank. Selling in ICICI Bank was owing to weak results announced by the company for the quarter ended December 2009. Continuing to cut down its balance sheet size, the bank reduced the size of its loan book by 16% YoY in 9mFY10. This was backed by 6% YoY fall in the deposit base as well. While ICICI Bank attributed the fall in advances to repayments by retail and international customers, the bank's unwillingness to incremental lending was also evident. On the liabilities side, it concentrated on CASA (low cost) deposits which grew to 37% of the bank's total deposits in 9mFY10 from 27% in 9mFY09. The bank's strong capital adequacy ratio of 19.4% and net interest margin of 2.6% at the end of December 2009 were, however, encouraging signs. Net NPAs remained at 2.2% of advances.

Tata Power was also amongst the biggest losers in the Sensex. It was closely followed by Sterlite, HDFC, and Bharti Airtel. Selling in Tata Power has continued after the company has announced weak 3QFY10 results just a couple of days back. The company had announced a 12% YoY decline in sales owing to lower electricity tariffs in the Mumbai market. Tata Power is on an aggressive expansion drive, and we see the company facing some execution issues out there. Over that, the stock's current valuations do not leave much on the table for investors.

Sensex sheds 2% on profit booking
02:30 pm

Cautionary sentiments in global markets and mixed result announcements by Indian heavyweights led investors to withdraw to the sidelines during the previous hour. Heavy profit booking in engineering, power and financial stocks led the near 350 points slide in the benchmark BSE Sensex. Select stocks in FMCG, pharma and auto stocks, however, managed to retain investor interest.

The BSE Sensex and NSE Nifty are trading in the red, down by 370 points and 120 points respectively. Midcap and smallcap stocks are also trading in the negative, down by 2% each. The rupee is trading at 45.99 to the dollar.

Crude oil prices have seen a negative trend today ahead of the release of a widely monitored US energy reserves report. Crude prices have been under pressure after the Chinese banking regulator yesterday commented that China would rein in credit after explosive growth last year. Thus as the world's most populous nation moves to cool its economy, the expected monetary tightening and stimuli wind up is not going well with investors. China’s moves in this direction are closely watched as the country is the largest consumer of imported commodities ranging from copper to crude oil.

After India’s chief statistician yesterday outlined inflation being the prime risk for the economy, here is some relieving news. Food inflation softened to 16.8% for the week ended January 9, 2010. According to the government data, while the prices of vegetables rose by 7.9% and that of fruits by 3.8%, milk prices soared by 13.9% YoY. Controlling higher food inflation has been on the government’s and the central bank’s agenda for a while now and the near term action on interest rates and monetary policy is expected to be guided by this concern. Having said that, the necessity of stimulus withdrawal is no less pertinent in India than in China to avoid bubble-like situations. HDFC and ICICI Bank are the key losers in the financial sector currently.

Indices sink deeper into the red
01:30 pm

The Indian stock markets almost doubled their losses, sliding deeper into the negative territory during the previous two hours of trade. Sentiment continues to remain weak across sectors on account of persistent selling in capital goods, banking, power, consumer durables, healthcare and stocks. Only stocks from the FMCG space are still in the positive.

The BSE Sensex and NSE Nifty are trading in the red, down by 200 points and 60 points respectively. Midcap and small cap stocks are also trading in the negative, down by 1.2% and 1% respectively. The rupee is trading at 45.94 to the dollar.

Two wheeler major TVS Motors announced its December 2009 quarter results yesterday. The company's topline grew by 25% during the quarter led by 26% growth in volume sales, both on a YoY basis. The company's operating profits grew by an impressive 43% as margins expanded by 1%. Lower interest and benign depreciation charges further helped the company post a strong profit during the quarter as opposed to a small loss during same quarter last year. Its bottomline for the nine month period grew more than fourfold on the back of a mere 14% growth in topline.

No favorable shift was witnessed in product mix. Motorcycles, a high value product for the company grew by 18% YoY in the domestic markets. While the growth is impressive, it has come in way below industry growth rate of 40%, indicating loss of market share. Growth in scooters however came in much higher at 42% YoY, beating the industry growth rate of 17% and buoyed by success of new launches. The surprise package though was the mopeds segment, which managed a growth of 49% YoY and contributed the most to overall growth. TVS is currently trading lower on the bourses. Infact the entire auto sector is witnessing selling pressure currently with the exception of M&M which is seeing gains.

Pharma major Biocon announced its results a while back. Its revenues for 3QFY10 grew by a robust 46% YoY, led by the strong performance of both its biopharmaceuticals and contract research businesses. EBDITA margins fell by 3.8% during the quarter on the back of a rise in raw material costs and other expenses (as percentage of sales). While the company's bottomline grew at a stupendous pace during the quarter, the same was largely due to the forex loss incurred in 3QFY09, which is not present this quarter. On excluding the same, growth in bottomline stands at 15% YoY, much lower than its impressive topline growth on account of the company's fall in operating margins. Biocon is currently trading lower.

Banks, healthcare drag markets down
11:30 am

After witnessing a weak start, the Indian stock markets slid deeper into the negative territory during the previous two hours of trade. The markets witneseed weak sentiments on account of persistent selling in banking, consumer durables, healthcare and capital goods stocks. However, stocks from the IT, telecom, auto and realty sectors are finding favour.

The BSE Sensex and NSE Nifty are trading in the red, down by 90 points and 25 points respectively. Midcap and small cap stocks are also trading in the negative, down by 0.32% and 0.04% respectively. The rupee is trading at 46.03 to the dollar.

As per a leading business daily, Yes Bank, is planning to raise around US$ 150-200 m through a Qualified Institutional Placement (QIP) before the end of this fiscal. The bank is also considering raising Rs 750-800 m through another perpetual issuance by March 2010. These fund raising initiatives are aimed at garnering a total capital base of more than Rs 50 bn by the beginning of next fiscal. This is expected to aid the bank in strengthening its balance sheet and do more business with existing and new customers. It may be noted that the bank amassed Rs 3 bn from the recent fund-raising issue. The bank is looking to enter new businesses and is eyeing opportunities in the electronic broking, alternate asset management and mutual funds business. The bank is planning to start 2 new businesses this calendar year.

Praj Industries declared its 3QFY10 results today. The company's sales fell by 29% YoY during 3QFY10, 16% YoY in 9mFY10. Its operating margins improved by 0.8% YoY during the quarter, largely on account of lower raw material and other expenditure (both as percentage of sales). Net profits fell by 38% YoY during the quarter, primarily due to a significant fall in other income as well as a higher effective tax rate. It may be noted that Praj is planning to get into the customized engineering business in areas other than ethanol production. Within this the company is looking to manufacture specialised equipment for segments like oil & gas, petrochemicals, chemicals, water treatment, as also fermentation equipment for pharma, biotech and other industries etc. Its capital expenditure for the current financial year (FY10) is slated to be about Rs 300 m, and includes the amount it intends to spend on the above initiatives. We believe that the company's new ventures will have a strong impact on its future profitability.

Indian markets join weak Asia
09:30 am

The Indian markets have started today's session on a weak note. The benchmark indices opened below the breakeven mark and have not managed to break in to the positive since then. Other key Asian markets are trading in the negative with Hong Kong (down 1%) leading the pack of losers. The US markets closed 1% lower yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading in the red with banking and metal stocks facing the brunt of selling activity. However, select auto stocks are in the green. The BSE-Sensex is trading lower by around 50 points, while the NSE-Nifty is down by about 15 points. Selling is also being witnessed among mid and small-cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading lower by 0.2% and 0.1% respectively. The rupee is trading at 46.01 to the US dollar.

Pharma stocks have opened the day on a weak note. Losers here include Dr. Reddy's and Cadila Healthcare. As per a leading business daily, Lupin has received clearance from the US Foods and Drugs Administration (FDA) for its plant at Mandideep, Madhya Pradesh. This will allow the company to start selling new products made at the plant in the US. The FDA has also approved Lupin's manufacturing facilities at Aurangabad and Indore following a recent inspection by officials of the drug regulator. The Mandideep plant has also got approval from both the UK and Australian drug regulators. In our view this is a positive development for Lupin given its plans to seek drug approval for about 30 to 35 new drugs in the US.

Auto stocks have opened the day on a strong note. Gainers here include M&M and Maruti Suzuki. As per a leading business daily, Indian automakers are expected to increase their expenditure on research and development (R&D) and new product launches by 25% to 30%. The move is expected on the back of fierce competition from global auto giants. They are keen on India, which is among the most promising auto markets. In fact, they have designed compact cars specifically for the Indian market. Toyota's Etios, Volkswagen's Polo, General Motors' Beat and Ford's Figo are prominent examples. It may be noted that the international giants have much higher R&D expenses as a percentage of sales than their Indian counterparts. As a result, barring Tata Motors' Nano, few Indian models have managed to grab headlines. However, Maruti Suzuki will soon launch its first fully India configured small car.

In 2010, Sensex will gain...
Pre-Open

The stock market outlook for 2010 is locked. The intelligentsia has given its verdict. If you are looking to invest in stock markets from a one year perspective, expect your returns to be in the region of 10%-20%. No, we are not saying it. This conclusion was drawn from a survey among India's top fund managers who manage a whopping Rs 1.7 trillion collectively between them. The survey that was published in one of India's leading dailies has fund managers believing that insurance money could be a big driver during the next stage of rally and the same could help the Sensex move in a narrow band in 2010 with an upward target of 18,000 on the Sensex.

We would however refrain from giving such exact numbers. But even we would want to side with the majority of the fund managers in the survey. Our research is not throwing up as many fundamentally good stories available at attractive valuations as it used to do say about a year back. In other words, do not keep looking for that multibagger. It may not show up that easily as most of the gap between price and value has been filled up and now, it is more about earnings growth than expansion in P/E multiples. And hence, the 10%-20% growth that most fund managers seem to be anticipating could indeed be the right number as that is the rate at which the earnings of India Inc likely to grow in the near to medium term.

And now, it's the turn of milk prices to flare up
Sugar and milk. What a delightful combination. In fact, it could be called as the elixir of life. But it is turning out to be a deadly poison for one man, Mr. Sharad Pawar, the agriculture minister of India. Already under flak for not being able to check spiraling prices of sugar, a new front has opened against him. This time in the form of rising prices of milk. The agriculture minister seems to have said recently that the prices of milk and related products are set to rise because of the demand supply mismatch. As per him, there seems to be a gap of 18 lakh tones between demand and milk supply and with the same unlikely to be bridged in the near term, consumers may have to shell out more now for milk also.

While the various states and the center play a blame game on the inability to check spiraling prices of essential commodities, even if the objective of lowering prices is met, it is going to do nothing to solve the longer term demand supply mismatch. What we need is a structural change in production and not some ad-hoc measures like higher imports and release of more buffer stocks that provide only temporary relief.

But for a political class that is all too willing to accommodate near term relief at the expense of long term benefits, it will be wrong on our part to expect them to do too much, too soon. Meanwhile, be prepared to pay structurally higher prices for food items from hereon.