Markets take CRR in their stride!
Closing

It was yesterday all over again as the indices managed to eke out small gains for themselves in what could be considered as another volatile session. While the Sensex edged higher by around 50 points (up 0.3%), NSE Nifty closed with gains of around 20 points (up 0.4%). BSE Midcap and BSE Small cap indices also remained buoyant today, ending with gains in the region of 1% each. Advance to decline ratio was once again evenly split on the Sensex with one stock declining for every one that advanced.

Major Asian indices closed lower today while European indices are trading mostly strong currently. Rupee was trading at 46.3 to the dollar at the time of writing.

The markets ending higher despite RBI initiating steps towards sucking excess liquidity in the system sends out one clear message. The message that the system is awash with funds and a CRR hike to the tune of 0.75% is likely to have no impact and it will be business as usual. Furthermore, markets were also buoyed by the upward revision of India’s GDP growth by the central bank. Thus, with the monetary policy done and dusted with, it is over to the Union Budget now. Of course, any negative development on the global front is also likely to have an impact on the market movement. But as far as the impact of monetary policy is concerned, it has rather turned out to be a non-event.

Steel majors like Jindal Steel, SAIL and Tata Steel all ended weak today. The weakness in Tata Steel was despite robust numbers posted by the company for the quarter ended December 2010. The company’s standalone topline grew by 33% YoY on account of a 49% growth in volumes. EBITDA margins also expanded and with significantly higher other income and lower forex losses, the bottomline witnessed a strong growth of 156% YoY. As a result of this strong performance, numbers for the nine month period also improved a bit with the bottomline decline standing at 23% on the back of a 1% drop in topline. The company also mentioned that its Corus operations in Europe are witnessing signs of revival and these developments indeed augur well for the future growth of the company.

Shipping major GE Shipping also announced its results. Consolidated sales declined by 27% YoY during 3QFY10 and 31% YoY during 9mFY10. Operating margins fell to 23% in 3QFY10, from 38.6% in 3QFY09. Higher staff costs and sharp rise in cost of hiring chartered ships were the key culprits. On the back of lower sales, weaker operating margins, and higher depreciation, net profits declined by 68% YoY during the quarter. Profits were down 72% YoY during the nine-month period. For the current fiscal, the management continues to see the demand outlook to be very weak, both for the crude oil and dry bulk segments. On oil, it believes that contraction in world output is likely to depress energy consumption more so in the energy intensive OECD countries. To add to this, high fleet growth (net addition to the global fleet is expected to be around 8-14% during the current year) will continue to cast its dark shadows. Both these factors put together are likely to keep pressurizing rates and utilization levels for the crude tanker segment.

CRR hike makes for a volatile mkt
01:30 pm

The Indian markets had a volatile session during the previous two hours of trade. Most of the sectors are trading in the red led by metal and IT stocks. However, select stocks from the capital goods sector are managing to garner investors' interest.

The BSE Sensex and NSE Nifty are trading in the red, down by 140 points and 30 points respectively. The BSE-Midcap and BSE-Smallcap are also trading down by 1.1% and 1.4% respectively. The rupee is trading at 46.36 to the dollar.

The Indian central bank released its third quarter review of Monetary Policy a while back. Not willing to let loose the inflationary spiral, the central has come down pretty sternly on the excess liquidity floating around in the system. The instrument used has been the CRR or the cash reserve ratio. This ratio at which banks maintain cash with RBI (as a percentage of their deposits) has been hiked by 0.75%. It is meant to suck out liquidity to the tune of Rs 360 bn. The hike, will in two stages, bring the CRR from 5% currently to 5.75% by the end of February 2010. As for the challenges that the RBI foresees for the economy, fiscal deficit tops the list. The bank is also hoping for the government to phase out some of the stimuli offered to pump prime the economy. The Union Budget 2010-11 is expected to throw more light on this. Meanwhile, the RBI has also raised its GDP growth projection for 2010 to 7.7%.

Engineering major Crompton Greaves announced its 3QFY10 results yesterday. Its consolidated sales grew by 4.5% YoY during 3QFY10, led by a strong performance from the 'consumer products' business, which recorded a growth of 27% YoY. Operating margins expanded substantially by 3.7% YoY. This improvement was aided by a big drop in raw material costs (as a percentage of sales). On the back of improvement in operating margins, substantially lower interest expenses and higher other income, the company's profits surged by 62% YoY during the quarter. its performance during 9mFY10 was almost similar as profit rose by 51% YoY despite a tepid sales growth of about 6% YoY. The company has declared an interim dividend of Rs 1.4 per share. It has also recommended an issue of bonus shares in the proportion of 3:4. The stock of Crompton Greaves is currently trading lower on the bourses.

The downward march continues
11:30 am

The Indian markets continued to lose traction during the previous two hours of trade on the back of persistent selling activity among the index heavyweights. Currently, intense selling pressure is being witnessed across all the sectors. Stocks from the metal, IT, telecom and consumer durables sectors are bearing the maximum brunt of profit booking.

The BSE-Sensex and NSE-Nifty are trading weak, down by around 191 points and 47 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 1.6% and 2.0% respectively. The Rupee is trading at 46.40 to the Dollar.

Real estate development major, DLF declared its 3QFY10 results yesterday.The company's topline grew by 48% YoY and 16% QoQ during the quarter on back of strong sales booking and low base effect. However the sales were down 39% YoY for the period 9mFY10. Its operating margins dropped to 42% during 3QFY10, from 57% in 3QFY09. This is on the back of higher overall expenditure primarily related to land acquisition and development rights.Net profits declined by 30% YoY during 3QFY10 due to higher tax rates and burgeoning interest cost. The total developable area stood at 430 msqft at the end of the quarter as compared to 423 msqft at the end of the preceding quarter.

It may be noted that DLF's management plans to focus on the mid-income housing segment on a pan-India basis and has forthcoming launches at attractive price points in Chennai and Kochi. It also has been working consistently on reducing its debt burden by selling its non-core assets. The company divested and realized approximately Rs 1.7 bn during the quarter through sale of some of its non-core assets and plans to garner about Rs12.5 bn by the end of last quarter. We believe that with the commencement of construction for SBM and other projects, cash flow visibility over the next few quarters will improve.

According to a leading business daily, Indian Steel major Tata Steel has formed a joint venture (JV) with Japan's largest steel producer, Nippon Steel Corporation (NSC). This JV in which Tata Steel will hold 51% stake will produce and sell automotive cold-rolled flat products in India. As an aim to tap the growing demand for high-grade automotive steel, the JV will set up continuous annealing and processing line (CAPL) with a capacity of 6,00,000 tonnes at Jamshedpur. The Japanese partner will transfer its technology for producing automotive high-grade steel. The JV is expected to be concluded by June 2010 and start operations before March 2013. We believe that this JV will aid the company is better addressing the local needs of the Indian automotive industry and reinforcing future growth for itself as well as Indian auto sector.

Back to selling mode
09:30 am

After breaking the jinx yesterday after the selling spree seen over the previous six sessions, Indian markets have started today again on a weak note. The benchmark indices opened way below the breakeven mark and have not managed to make any progress towards the positive territory since then. Other key Asian markets are trading in the red with South Korea (down 1.7%) leading the pack of losers. The US markets closed lower by 1.1% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading in the red with software and auto stocks facing the brunt of selling activity. The BSE-Sensex is trading lower by around 175 points, while the NSE-Nifty is down by about 40 points. Selling is also being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading lower by 1.9% and 1.6% respectively. The rupee is trading at 46.4 to the US dollar.

Engineering stocks have opened on a weak note. Losers here include Voltas and Cummins India. As per a leading business daily, BHEL has signed a joint venture (JV) deal with Madhya Pradesh Power Generation Company (MPPGCL) for setting up a 1,600 MW supercritical thermal power plant in Khandwa district. Both the companies will hold equal stake in the JV. Eventually, 48% stake will be diluted in favor of other investors. The first 800 MW unit of the project will come in the next 48 months and the other unit within the next 54 months. BHEL will supply the equipments. It may be noted that the company already has two similar JVs, one with the Tamil Nadu Electricity Board and the other with the Karnataka Power Corporation. Together they will set up thermal power projects of around 4,000 MW. In our view, the Madhya Pradesh JV is a continuation of the company's strategy to expand from the 500 MW space into the more challenging area of super-critical technology. In fact, it has entered into tie-ups for sourcing technology for the 800 MW sets with super-critical parameters, suited to Indian conditions, using Indian as well as imported coal.

Energy stocks have opened the day on a negative note. Losers here include MRPL and Gujarat Gas. As per a leading business daily, HPCL plans to invest Rs 250 bn to set up a refinery with an annual capacity of 15 m tonnes a year on the west coast. The exact location could be anywhere between Mumbai and Goa. This project will augment the capacity of the HPCL's existing Mumbai refinery, which cannot be expanded due to space constraints. In fact, the 6.5 m tonne Mumbai refinery is located in a space of 350 acres when it requires 2,000 acres. In our view, the new project makes sense from an operational standpoint. However, we have concerns when it comes to financing the project. The debt equity ratio is planned at 2:1 or 2.5:1. Given the financial difficulties faced by the oil marketing companies on account of under-recoveries on fuels, funding a capital expenditure of this magnitude is going to be a problem.

How will RBI tackle inflation?
Pre-Open

The life of policy makers is filled with difficult choices. The reality they have to deal with does not come in neat packages. Hence, there is seldom a perfect solution to pressing problems. Take India's current landscape.

Compared to the developed nations, India managed to survive the economic slowdown relatively well. While the world went in to the deep freeze, the Indian growth story merely took a pause. And it is now back in the limelight. But so is inflation.

There in lies the issue of difficult choices. While everyone wants the growth story to continue unabated, the rapid food price inflation is reaching unmanageable levels. In fact, it is rapidly becoming a political nightmare. Yesterday there were massive protests in Bihar over food prices. The RBI could increase interest rates to tame the price rise. But that could lead to a serious side effect. It could retard growth.

In order to avoid that choice, the central bank is likely to instead opt for raising the reserve requirements of banks today in its monetary policy review. In fact, observers widely believe that it will raise the cash reserve ratio (CRR) by 0.5%. CRR is the proportion of deposits that banks must keep in cash with the RBI.

The RBI is not the only one having to make the difficult choices. The central government is too. It would want to control the excessive liquidity in the system. But there is one very useful purpose the liquidity is serving. It has propped up the stock markets. At a time when several public sector companies are slated to come up with public issues, the last thing it needs is for the markets to lose their legs and fall.

Does India have the innovators?
The last few days have been eventful for all technology lovers. Be it the Auto Expo in Delhi or the Consumer Electronics Show (CES) in Las Vegas - there are interesting developments in several new technologies. Innovation is not only a matter of technology. It is as much a matter of economics.

Ask yourself, where do the bulk of cutting-edge information technology products come from? The US. It is one of major reasons for its economic dominance over the last several decades. Other major economies like Japan and Germany are also technology leaders in several industries. Nations like South Korea, which have recently joined the developed world, are also bold innovators.

How about us Indians? Sure, we are not in the same league as these countries. In our opinion though, we are showing positive signs. Take the entire brouhaha about Apple's ipad launch. It is supposed to take the fight to Amazon's Kindle. Both American companies. Much of the underlying display technology is either Taiwanese or South Korean. But the interesting thing is that small Indian start ups have come up with their own devices. Hyderabad based Notion Ink is working on a tablet, in the same space as Apple. Ahmedabad based Infibeam is working on an e book reader, in the same space as Amazon. It may sound trivial, but innovation is no trivial matter. The role of a Sony, Toyota or Honda in transforming Japan to the world's second largest economy cannot be overemphasized. The question is, are there such companies in India too?