Markets get no respite from selling
Closing

Persistent selling activity across index heavyweights refused to show any signs of abating causing the indices to close well below the dotted line. While the BSE Sensex closed lower by around 192 points (down 1%), the NSE Nifty lost around 58 points (down 1%). Midcap and smallcap stocks were also at the receiving end losing 1% each. Losses were largely seen in IT, healthcare and banking stocks.

As regards global markets, Asian indices closed weak today while European indices are trading mixed currently. The rupee was trading at Rs 46.08 to the dollar at the time of writing.

Telecom stocks closed mixed today. While Idea Cellular and Bharti Airtel closed firm, MTNL and Reliance Communication closed into the red. Bharti Airtel announced its 3QFY10 results today. The company’s sales grew by 7% YoY during 3QY10, 15% YoY during 9mFY10. Growth during the quarter was led by the company’s passive infrastructure business, wherein revenues increased by 35% YoY during the quarter. Revenues of mobile services segment increased marginally. Mobile subscriber base stood at almost 119 m at the end of December 2009, higher by about 39% YoY. During the quarter, the average revenue per user (ARPU) declined by 29% YoY and by 9% QoQ (as compared to 2QFY10). Average minutes of usage (MOU) declined by 12% YoY and 1% QoQ (as compared to 2QFY10). Operating margins contracted by 0.8% YoY to 39.3% on the back of higher network operating costs (as a percentage of sales). Net profits grew by 13% YoY during 3QFY10, 23% YoY for the 9mFY10 period. Growth in bottomline was on the back of a decent operating performance and interest income.

As per a leading business daily, domestic pharma company Lupin has received clearance from the US FDA for its plant at Mandideep in Madhya Pradesh. It must be noted that the Mandideep facility had been issued a warning letter in late 2008 when the US FDA found it guilty of not complying with quality manufacturing standards. Thus, the green signal means that the company can start selling new drugs from this plant in the US market. Further, Lupin has also got the go ahead for two of its manufacturing facilities at Aurangabad and Indore (oral solids and oral contraceptives) from the US FDA after a recent inspection by officials. Of late, many Indian pharma companies have come under the scanner of the US FDA notably Ranbaxy and Sun Pharma’s 76% subsidiary in the US, Caraco. While these two companies have yet to sort their issues with the US regulator, the fact that Lupin has been able to do so is certainly a positive sign. The stock closed higher today.

Paints stocks closed weak today and the key losers here were Asian Paints, Berger Paints and Kansai Nerolac. Asian Paints announced its 3QFY10 results a short while ago. On a consolidated basis, sales grew by 23% YoY during the quarter led by strong demand conditions for decorative paints in most parts of the country. Operating margins improved by 11.3% to 19.6% due to lower raw material prices as compared to last year. However, the management does not expect these lower prices to be sustainable going forward. Having said that, good profit growth in all the three business units i.e. Decorative, Industrial and International helped in buoying overall profitability. Because of a strong performance both at the topline and the operating profit level, net profits tripled during the quarter.

Realty, IT weigh heavy on indices
01:30 pm

While the Indian markets continue to trade in the red, they have recouped some lost ground in the last two hours of trading. FMCG companies are the only bright spot in an otherwise gloomy market which is witnessing major selloff in all the remaining sectors. Profit booking is being witnessed in the realty, IT and health care space.

While still in the red, the BSE-Sensex and the NSE-Nifty have recovered from the day's lows and are trading lower by 166 and 55 points respectively. BSE-Midcap Index is trading lower by 86 points while the BSE-Smallcap index is lower by 119 points. The rupee is trading at 46.12 to the US dollar.

ING Vysya Bank (ING) declared its 3QFY10 results yesterday. Operating profit for the quarter was higher by 37% YoY while net interest income (NII) increased by 27% YoY. Net interest margin (NIM) was recorded at 3.4% during the quarter. This was higher by 0.32% over the corresponding quarter in FY09. However, advances grew by only 7% YoY, lower than the sector avergae. CASA grew by 30% during the quarter resulting in a CASA ratio of 32%. Net NPA stood at 1.67% which is high for a private sector bank.

Indian Hotels (IHCL) has taken a hit on its stake in Bermuda-based luxury hotel chain operator Orient Express Hotels (OEH). This has come about by IHCL's decision not to participate in OEH’s rights issue sale. The decision is a culmination of OEH’s refusal to have a tie up with IHCL. Moreover the company had issued Class B shares which serve to block any hostile takeover bid. IHCL which held 9.7% stake in OEH through Class A shares saw its holding drop to 7.75% after the rights issue. IHCL had invested about Rs 10 bn in OEM. However, the value of this investment has now slipped to Rs 2.6 bn. We believe that IHCL no longer sees OEH as a strategic alliance.

Intense selling continues on D-street
11:30 am

The Indian markets continued to shed gains during the previous two hours of trade on the back of sustained selling activity among the index heavyweights. Currently, selling activity is being witnessed across all the sectors except FMCG. The stocks from the realty, consumer durables, healthcare and oil & gas sectors are bearing the maximum brunt of profit booking.

The BSE-Sensex and NSE-Nifty are trading weak, down by around 242 points and 77 points respectively. This weakness is being witnessed in the mid and small stocks as well. The BSE-Midcap and the BSE-Smallcap indices are also trading lower, down by around 1.9% and 2.3% respectively. The Rupee is trading at 46.23 to the Dollar.

Indian engineering equipment major, BHEL declared its 3QFY10 results yesterday. The company's sales grew by about 18% YoY, primarily on the back of 19% YoY increase in its 'Power' segment. The operating margins expanded by a decent 2.9% YoY owing to fall in raw material costs and other expenditure (as percentage of sales). Robust margin improvement enabled the company in registering a strong 36% YoY growth in net profits for the quarter. The company's order backlog stood at Rs 1,340 bn at the end of December 2009. It also declared an interim dividend of Rs 11 per share. In the management's view, the company is on track to achieve its sales guidance of Rs 320 bn for FY10, which we believe in all probability is achievable.

According to a leading business daily, there appears to be a significant improvement of credit offtake in the Indian economy suggesting a distinct change in business environment and corporate sentiments. In the period from mid-November 2009 to the end of December 2009, banks lent over Rs 1,180 bn which is nearly 4 times the money lent in the corresponding period of 2008. Lately, banks are seeing a significant rise in demand for loans as the companies' surplus inventories are drying up, triggering the need for working capital loans. The demand for retail loans is also picking up as home buyers are going ahead with their purchases. Also demand increase has been seen from the auto as well as infrastructure sectors. It appears that corporates, which so far tapped the capital markets for funding their working capital needs, are going back to the banks. This appears to be a positive sign for the Indian banking sector. However, despite this surge in credit offtake, banks are estimated to miss the RBI's target of 18% credit growth for FY10.

Markets down on global cues
09:30 am

The Indian markets have started today's session on a weak note. The benchmark indices opened way below the breakeven mark and have not managed to stem the losses since then. Other key Asian markets are trading in the negative with Japan (down 2.7%) leading the pack of losers. The US markets also closed 2% 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. The BSE-Sensex is trading lower by around 257 points, while the NSE-Nifty is down by about 92 points. Selling interest is also being witnessed among mid and small-cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading lower by 2.1% and 2.6% respectively. The rupee is trading at 46.25 to the US dollar.

Energy stocks have opened the day on a weak note. Losers here include Petronet LNG and MRPL. Oil and gas exploration and production major ONGC announced results yesterday. The company's standalone topline grew by 23% YoY during 3QFY10 on account of higher gross realisations and lower subsidy burden per barrel of crude oil. Subsidy declined from US$ 25 per barrel in 3QFY09 to US$ 19 per barrel this quarter. Operating margin increased to 60% during the quarter from 41% in 3QFY09 as trading of MRPL products have been discontinued. However, other income turned negative during the quarter. The standalone bottomline registered a growth of 23% YoY during 3QFY10 on account of higher operating margins, despite higher depreciation and tax outgo.

Software stocks have opened the day on a weak note. Losers here include Mahindra Satyam and NIIT. As per a leading business daily, Mahindra Satyam has requested the Commerce Ministry for more time to develop the three IT Special Economic Zones (SEZs) in Andhra Pradesh. In fact, 10 other applicants have also sought extension for the SEZs. It may be noted that recently companies had also sought extensions for SEZs in Gujarat. SEZs had caught the fancy of large corporate primarily because of the tax exemptions - 100% for the first five years and 50% for the next five. However they entail massive capital expenditure which becomes a struggle when companies hit a rough patch. In our view, the request for extensions is a clear indication that companies have become much more cautious about their expansion plans after the slowdown.

China and India can survive a bubble
Pre-Open

One of the great things about investing is the range of thought it permits. An investor can focus on the quarterly earnings of a company. He or she could equally think about the fortunes of nations over the decades. The fortunes of entire countries ebb and flow with time. What were once superpowers become also-rans. Poor, struggling nations rise to prominence.

Interestingly, there are often parallels between the paths nations take to prosperity. Take the rise of China. The one economy the entire world is looking at. Its GDP growth seems to be unstoppable. Much like that of Japan in the late 1980s. Japan was tipped to become larger than the US. Today, the same prediction is made for China. The fundamentals are similar. People save a great deal. The currency is undervalued. The economy is driven by exports. There's a tendency to build excess capacity. Banks lend too much. Hence, many believe China might meet the same fate as Japan did when its bubble burst - decades of sluggish growth!

Interestingly, The Economist argues that China's case now is not as extreme as Japan's was then. China's stock market valuations and average property prices are nowhere in the same region as Japan's. As for overinvestment, it is more a case of being uneven. Yes, China has the world's ten longest bridges and the world's fastest train. But 40% of its villages are not connected by paved roads. The US was also growing fast in the 1910s and 1920s. China produces less steel per person now than the US did then. It also has a smaller railway network than the US did then. As for over lending by banks, much of it could be considered as fiscal stimulus. Something that was called for after the global financial meltdown.

Even if China were to crash, the fact that it is still a developing economy and not a developed one will help. There will be enough scope for adding capital goods, improving technology and increasing labour productivity. In fact, Japan, South Korea and Taiwan - all recovered from crashes when they were poorer.

In our view, the lesson applies equally well to India. Agreed that the Indian economy is a different beast than the Chinese economy. But we also have plenty to do. Yes, that means housing is scarce. The condition of our roads is pitiful. Public transportation is an everyday harassment. Few places have a steady power supply. But if and when we get around solving these problems, they will rev up the economy in a very productive manner. Oddly enough, that might act as insurance if our economic growth were to suddenly hit a roadblock.