Massacre on Dalal Street
Closing

Intense pain continued on Dalal Street as stocks across the board took a severe beating today. Investors’ fears regarding rising inflation and the possibility of higher interest rates rocked sentiment today. Cut-down in China’s lending and other weak global data also continued to spook the markets. Today’s worst performers came from sectors like realty, metal, and auto - the heroes of last year’s bull-run. On the broader BSE, just one stock gained today for every seven that closed in the red.

The BSE Sensex and NSE Nifty closed with losses of around 490 points (2.9%) and 155 points (3.1%) respectively. Mid and small cap stocks followed suit. The BSE Midcap and BSE Smallcap indices closed down by 4.3% and 5.5% respectively. Worst performers among the Sensex heavyweights included Tata Steel, DLF, Tata Motors, Wipro, and Maruti.

Indian markets were in fact the worst performer amongst all key Asian markets. China (down 1%) and Japan (down 0.7%) were the next to follow. European markets have also opened in the red.

Realty stocks closed deep in the red today. DLF and Unitech closed with big losses. Fear of a rise in interest rates seems to have stung investors in these stocks. This comes even as realty companies are just about to get over their liquidity issues after the last crisis that engulfed them in 2008 and the first half of 2009. Now if one were to go by the comments from Mr. K.P. Singh, the founder promoter of DLF, several small realty companies will soon have to shut shop as consolidation intensifies within the sector. The sector is reeling under oversupply, especially in the commercial real estate space. Now if interest rates were to rise from here on, which they are most likely to, it will act as a nail in the coffin for players that still have stretched balance sheets.

Metal stocks were the second biggest losers amongst BSE’s sectoral indices. Intensive selling pressure was seen in heavyweights like Hindalco, Tata Steel, and SAIL. Pressure on SAIL was despite a robust set of numbers announced by the company. The company has recorded a 99% YoY growth in its net profits during 3QFY10. This came on the back of a 12% YoY growth in net sales and margin expansion. Operating margins moved to 26.1% in 3QFY10 as against 12.8% in 3QFY09. Lower raw material and employee costs led to this sharp improvement in margins. The company sees a further improvement in its production and sales volumes during the current quarter (4QFY10). This is apart from its expectation of a rise in steel prices on the back of rising prices of key raw materials.

Small-cap stocks as a category were the worst hit today. While the BSE Smallcap index lost around 5.5%, stock specific losses ranged from 3% to 8%. In fact, around 30% of the stocks from the index closed with losses over 5%. Small caps, as is widely known, have been the biggest gainers in the bull-run that started in March last year. Even after the latest fall, the index is up around 190% up from its lows of last year. The index’s P/E currently stands at around 18 times, as compared to around 6 times at the start of the run up.

In short, small caps in general aren’t cheap anymore. And then there are several stocks that have run up to now trade at their multi year highs despite not much change in their fundamentals over the past year. We maintain a cautious view on small caps in general. Though one can still study hard and find some wonderful long term opportunities from within the space. But then, the question on top of one’s mind must be - what to buy as the markets correct?

The selling intensifies...
01:30 pm

The Indian markets lost further ground during the previous two hours of trade with selling activity being witnessed across all sectors. Among the sectoral indices, stocks from the realty, banking, auto, and metals are leading the fall. Not a single sectoral index is showing any gains currently.

The BSE-Sensex and the NSE-Nifty are currently trading lower by around 400 points and 110 points respectively. Stocks from the midcap and small cap spaces are currently trading in the red, with the BSE-Midcap and the BSE-Smallcap indices trading lower by 2.7% and 3.5% respectively. The rupee is trading at 46.40 to the US dollar.

FMCG behemoth HUL announced results yesterday. The company’s sales grew by 4.4% during 3QFY10. This growth was aided by the personal products segment, and was partly offset by the soaps and laundry segment due to a cut in laundry prices. Operating (EBITDA) margins for the company in 3QFY10 fell by 0.2% YoY and stood at 17.2%. This fall came on the back of higher advertisement costs (as a percentage of sales) recorded this quarter. The bottom line for 3QFY10 grew by 5.4% YoY on the back of higher extraordinary income. On adjusting for non recurring income, the bottom line fell by 9% YoY. The net profits for 9mFY10 fell by 6% YoY due to a lower exceptional income. However, when adjusted for one time income/loss the bottom line grew by 4% YoY.

Metals major Hindalco announced its results. Its standalone topline grew by 29% YoY during 3QFY10 on account of higher production in both the aluminium and copper segments. Higher realisations from copper also helped. The company’s EBITDA margins declined to 14% during the quarter from 19% in 3QFY09 primarily as raw material cost increases by 10% as a percentage of sales. Other income declined by 67% during the quarter. The standalone bottomline registered a decline of 22% YoY during 3QFY10 on account of lower operating margins and other income. A nearly unchanged tax outgo also did not help matters much. The company has issued 213 m shares through qualified institutional placement. The total proceeds were Rs 27.9 bn. It has been utilized in issue related expenses of Rs 430 m, Rs 450 m in various ongoing projects while the balance has been invested temporarily in mutual funds. Eventually they will be used to part finance the equity in new aluminium projects.

Sensex slips further
11:30 am

The Indian markets continued to trade on a weak note during the previous two hours of trade. Currently, selling activity is being witnessed across sectors led by stocks from the realty, banking, auto, and metals. FMCG stocks are the sole ones managing to garner investors' interest.

The BSE-Sensex and the NSE-Nifty are currently trading lower by around 251 points and 83 points respectively. Stocks from the midcap and small cap spaces are currently trading in the red, with the BSE-Midcap and the BSE-Smallcap indices trading lower by 1.3% and 1.6% respectively. The rupee is trading at 46.30 to the US dollar.

According to a leading business daily, India's largest carmaker Maruti Suzuki has outperformed its Japanese parent Suzuki Motor Corporation in terms of overall production in 2009. While the parent company rolled out only 9,08,302 cars during CY09, Maruti produced 9,66,399 units and sold even more (9,67,581 units). Out of its total sales, over 86% came from the domestic market primarily on back of robust sales of its small car Alto (2.4 lakhs) and WagonR (1.4 lakh units). In the overseas markets, its flagship export model A-Star was the best performer. It may be noted that the company is going to invest Rs 17 bn in expanding its production capacity at its Manesar plant near Gurgaon by 2.5 lakh units annually by 2012.

We believe that while the Indian growth story in automobiles remains intact, the intensifying competition and headwinds in the form of higher raw material costs and rising interest costs might make it difficult for the company to maintain this performance.

India's largest public sector bank SBI announced its 3QFY10 results recently. The bank registered a 14% YoY growth in its interest income in 9mFY10 and 4% YoY in 3QFY10. Its provisions tripled for the quarter as it provided for incremental slippage and attempted to comply with RBI's provisioning mandate. Addition in employee count resulted in an increase in cost to income ratio which stood at 52% in 9mFY10. It also saw a rise in gross and net NPA (non-performing assets) to 3.1% and 1.9% respectively. The bank's capital adequacy ratio stood at 13.8% at the end of 9mFY10. The bank declared an interim dividend of Rs 10 per share for the quarter. The bank is facing a lot of excess liquidity on account of increased deposits. However, its advances are not increasing in same proportion making it unable to deploy its excess capital effectively.

Indian markets open weak
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 recoup the losses since then. Other key Asian markets are trading a mixed bag with Hong Kong (up 1%) leading the pack of gainers. However, the Malaysian market is down 1%. The US markets closed marginally 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 200 points, while the NSE-Nifty is down by about 55 points. Selling is also being witnessed among mid and small-cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading lower by 0.7% and 0.6% respectively. The rupee is trading at 45.86 to the US dollar.

Telecom stocks have opened the day on a weak note. Losers here include Idea Cellular and Bharti Airtel. As per a leading business daily, Bharti has invited bids to outsource the management of its inter-city optic fibre cable network which stretches more than 120,000 km. The network carries voice and data signals between cities. The company plans to finalise the US$ 1 bn 5-year deal within the next two months. Bharti will form a joint venture with the awardee and will retain a stake in it. The company is also set to renew its multi-billion network-outsourcing contracts with Ericsson and Nokia Siemens this year.

Interestingly, state owned BSNL also plans to outsource the management of its fibre optic cable network. However, it has to worry about resistance from labour unions. In our view, Bharti will go ahead with its outsourcing plans given its knack and track record of focusing on functions it knows best.

Pharma stocks have opened the day on a mixed note. Gainers here include Cadila Healthcare and Elder Pharma. Indoco Remedies is the red. As per a leading business daily, Biocon, through its clinical services arm Clinigene is exploring a tie up with a clinical research organisation SIRO Clinpharm. It will help the companies offer complimentary services. While Biocon has a human pharmacology unit, SIRO has data management services. Biocon has two subsidiaries, Syngene and Clinigene, which are involved in custom research and clinical research respectively. Syngene contributes about 12% to the total consolidated revenues of the company, while Clinigene still does not contribute significantly. While the former is strong in molecular biology, synthetic chemistry and custom synthesis, the latter has developed capabilities in clinical R&D through clinical trials. In our view, this is a positive development given SIRO's expertise in conducting phase III and phase II clinical trials and its alliances with several overseas clinical research organisations in the past two years.

India: A shaky republic?
Pre-Open

Newspapers reported the chief minister of Orissa rushing out to meet the South Korean President after India's Republic Day celebrations. The act was not that of mere courtesy. The minister had to resolve the issues regarding South Korean Posco's steel manufacturing unit in the state.

Posco, the world's fourth-largest steelmaker by capacity has been trying to set up a plant in one of India's richest mineral endowed states. However, since 2005 the US$ 12 bn project has been hit by protests from local tribes unwilling to sell their land. Besides, environmental and regulatory hurdles have also held back the project. The central government has had little role in sorting out such issues. Singur being a case in point. State governments in turn do their best at lobbying for the projects. Posco's recent announcement of US$ 325 m steel plant in Karnataka left the Orissa government worrying.

On the 61st anniversary of the Constitution coming into force, India seems to be battling issues graver than those of half a century back. Some with little success.

Poor governance and corruption are only a few of the country's inherent growth obstacles. Acute inadequacy of energy, infrastructure, healthcare spending and trained manpower are amongst others. Without denying some crucial milestones crossed through liberalisation, there is a lot left to be desired.

Consider the country's financial markets. Debt markets have no identity outside government and corporate bonds. Despite having one of the most vibrant equity capital markets in the world, FIIs continue to call the shots. Most new IPO listings end up with promoters making a killing for their stakes.

A year back, the massive corporate fraud at Satyam Computers added a new dimension to India Inc's poor corporate governance practices. However, while markets recovered from the shock, little was done to bring in more credibility to Indian businesses. In particular this creates problems for minority investors in the family-owned businesses that are so common in India.

For example, controlling shareholders can strike deals even when conflicts of interest are readily apparent. By comparison, in Hong Kong and Singapore, companies making sizable deals need the approval of independent investors. Promoters buying stocks at below-market prices through the use of preferential warrants is another loophole. Supposedly to raise funds, the move nevertheless erodes minority ownership.

Company boards, meanwhile, continue to remain conflict-riddled. Leading real-estate firm DLF came under scanner because 3 of the company's 12 directors belonged to the Singh family and were members of the audit committee. DLF is not alone in facing this criticism. India's real-estate companies are often picked on by governance advocates who raise problems with everything from lack of disclosure to revenue reporting.

Instances of such malpractices ail the country's basic avenues of progress. The 61 years of being a republic have certainly won India many accolades. Being a well sustained democracy with one of the highest GDP growth rates being foremost amongst them. However, we believe that the next 60 years may be riddled with uncertainties unless the key socio-economic ailments are cured.