Energy stocks bail out markets
Closing

The benchmark indices on Indian bourses yet again managed to inch closer to the dotted line in the final hours of trade today, after struggling for most of the session. Primarily held back by the weakness in heavyweights from banking, IT and FMCG sectors, the indices started off on a weak note. Concerns over rise in interest rates and its impact on stocks and real estate prices clouded most of the near term outlook. Some positive news in terms of 9.3% rise in exports during the previous month, however, brought in some cheer.

While the BSE Sensex ended flat, the NSE Nifty closed higher, up by 18 points. The BSE-Midcap and BSE-Smallcap are closed up by 1.8% and 2.7% respectively. The rupee is trading at 46.3 to the dollar. Major Asian indices closed lower today while European indices are also trading low currently.

Energy stocks were amongst the few gainers in today's session. Stocks like GAIL, IOC and HPCL gained as much as 4 to 5%. The optimism about the sector amongst investors was backed by hopes of recovery of losses by state owned oil marketing companies. The Oil Ministry has stated that it will take a decision on the merits of raising the price of natural gas supplied by PSU oil and gas companies in coming weeks. It may be noted that the Finance Ministry is in favour of giving state-run oil firms freedom to fix prices of petrol and diesel in tune with their cost. While ONGC, Oil India and GAIL bore the entire Rs 84 bn under-recovery on petrol and diesel in 9mFY10, the government has agreed to give only Rs 120 bn in cash against the Rs 210 bn revenue loss on cooking gas. PSU energy firms, which account for about 40% of India's gas output of 140 m standard cubic metres a day, are seeking higher prices to make up for the under-recoveries.

Meanwhile the largest PSU banking entity in the country, State Bank of India (SBI) has come under the government scanner for pursuing profitability too aggressively. As per a business daily, the government has noted that had SBI made adequate provisioning for NPAs arising out of the farm loan waiver scheme, it would have reported a negative growth in profits for 9mFY10.

The government feels that the largest bank should have set an example rather than concentrating on posting better results. SBI's provision coverage ratio at 57% in 9mFY10 is amongst the least in the sector and well below RBI's mandate of 70% coverage. SBI has, however, argued that it has followed all the banking norms and there is little cause for concern. The stock lost 2% in today's trade.

A leading business daily today reported a major fire at SAIL's Bhilai steel plant in Chhattisgarh, severely hitting the production at the company's flagship manufacturing unit. Although no one was injured, officials from the company have stated that the production was hit severely. It may therefore take several days for the plant to resume normal production. The plant produces 17,000 tonnes of steel daily on an average. The Bhilai plant had seen a record production in FY09 as it produced 4.5 million tonnes of saleable steel. In 3QFY10 as well, higher volumes and improved sales mix helped the company put up 12% YoY growth in topline. The stock of SAIL lost 1% in today's trade.

IT, FMCG weigh heavy on the indices
01:30 pm

Despite a good attempt to make inroads into the positive territory, the benchmark indices slipped back into the red during the previous two hours of trade. Stocks from the IT and telecom sectors are the ones weighing heavy on the markets, and are leading the list of losers currently. However, consumer durable and pharma stocks are seeing healthy gains.

The BSE Sensex and NSE Nifty are trading in the red, down by 40 points and 1 point respectively. The BSE-Midcap and BSE-Smallcap are trading up by 1.5% and 2.5% respectively. The rupee is trading at 46.28 to the dollar.

Wind turbine major Suzlon announced its quarterly results over the weekend. Its topline fell 19% YoY during 3QFY10. The order backlog at the end of January 2010 for Suzlon's standalone wind business stood at Rs 81 bn. Operating margins contracted to 4.6% from 11% in 3QFY09. The deterioration in margins was on account of an increase in all major operating cost heads (as percentage of sales) for the company. Excluding extraordinary items, the company's bottomline showed a loss of Rs 2.2 bn during the quarter. This was largely on the back of the contraction in operating margins, as well as increases in interest and depreciation costs during the quarter. The company has reduced its net debt by Rs 33 billion from Rs 138 bn in September 2009 to Rs 105 billion in December 2009. Part of this has been made possible by the company's stake sale in Hansen. Evidently, the company continues to pay the price for its over ambitious expansion by using tons of leverage. Suzlon is trading higher on the bourses currently.

As per a leading business daily, software behemoth Wipro has been empanelled by General Electric (GE) as one of the outsourcing vendors as part of a master services agreement (MSA) signed between the companies recently. This agreement with GE will allow Wipro to bid for nearly about US$ 1 bn worth of outsourcing projects put out by the different business units of GE every year. As per reports, while this does not guarantee assured contracts, GE will be a good account to have for Wipro over the long-term. This is because even if the micro environment is bad, one or the other GE units would have something to outsource and offshore. It may be noted that another such vendor for GE, TCS, does nearly US$ 150 to US$ 200 m worth of projects for GE annually. Software stocks are currently trading mixed, with HCL Infosys and Wipro leading the list of gainers.

Interest rate worries spook financials
11:30 am

Despite a good attempt to make inroads into the positive territory, the benchmark indices continue to languish in the red during the previous two hours of trade. This time albeit closer to the dotted line than at the start of the session today. Profit booking in key heavyweights from the software, banking and commodity sectors have been instrumental for the pressure on the indices.

The BSE Sensex and NSE Nifty are trading in the red, down by 53 points and 4 points respectively. The BSE-Midcap and BSE-Smallcap are also trading down by 1.2% and 2.2% respectively. The rupee is trading at 46.34 to the dollar.

The government's nodal agency for financing power projects in the country, Power Finance Corporation (PFC), announced its December quarter results during last weekend. PFC managed to grow its advances by nearly 20% YoY so far in FY10 despite lower average credit growth in the banking sector. The 9% YoY growth in PFC's disbursements were despite 10% YoY fall in sanctions. Being the nodal agency designated by the Government of India for financing power projects in the country PFC managed to grow its asset book in 9mFY10 despite the slowdown in infrastructure sector in the past 9 to 12 months. The difference in sanctions and disbursements is because PFC is a project driven organization. The overall growth in loan book is well in line with our estimates. Also due to better pricing power, the net interest margins improved from 3.8% in 9mFY09 to 4.2% in 9mFY10. PFC's gross NPAs also remained negligible at 0.02% while net NPAs are 0.01% of advances in 9mFY10.

Ashok Leyland, India's second largest manufacturer of CVs is trading strong on the bourses today. The optimism in the counter seems to be a result of the company's robust 3QFY10 performance. The company has managed to grow its bottomline by more than five-fold during the quarter. This has come on the back of a 81% YoY growth in topline. Strong expansion in operating margins, to the tune of nearly 3% and lower interest and benign depreciation charges have ensured that the growth in bottomline has come in a lot higher than the topline growth. During the quarter, company's volumes more than doubled as not only did the economy rebound and industrial activity picked up but they were also coming off a low base as demand had virtually collapsed during same quarter last year. Thus, the quarter in a way, reflects a return to normalcy for the company and hence going forward, the kind of improvement we have seen in the company's performance may be difficult for it to replicate.

Heavyweights take the markets down
09:30 am

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 make any progress towards the positive territory since then. Other key Asian markets are trading in the red with China (down 2.2%) leading the pack of losers. The US markets closed lower by 0.5% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading in the red with software and banking stocks facing the brunt of selling activity. The BSE-Sensex is trading lower by around 145 points, while the NSE-Nifty is down by about 35 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 1.2% respectively. The rupee is trading at 46.3 to the US dollar.

Banking stocks have opened the day on a negative note. Losers here include IDBI Bank and PNB. As per a leading business daily, India's largest lender SBI plans to raise Rs 200 bn through equity in the next two years. The bank has a capital requirement of Rs 500 bn over the next five years. It expects to generate more than half of the amount through internal accruals. The rest will be raised through equity. SBI currently has excess liquidity of around Rs 750 bn. This is exerting pressure on its margins but is likely to continue for about six months during which it expects to shed bulk deposits around Rs 200 bn. In our view, the excess liquidity reflects the banks efforts to tap into its relationships with large corporates as well as retail customers and grow its deposit base. However, not all of it could be deployed profitably. As a result, the bank witnessed nearly 0.6% drop in net interest margins in 3QFY10.

Energy stocks have opened the day on a mixed note. Gainers here include BPCL and HPCL. Cairn India is in the red. As per a leading business daily, the government is considering hiving off ONGC's Assam oilfields into a wholly owned subsidiary in order to improve their productivity. The company produces 1.1 m tonnes per annum of crude oil from the Assam fields, employing a workforce of over 4,000. Interestingly, the other state-owned upstream company Oil India is willing to take over the Assam oilfields, which it believes it can run more efficiently than ONGC. It may be noted that the formal announcement for the hiving off has not been made. In our view, Oil India's contention makes sense given its extensive experience in onshore operations especially in the North East.

Can strong earnings growth continue?
Pre-Open

We are nearing the end of December 2009 quarter result announcements of India Inc. And the overall performance so far has been good to say the least. But while the overall profit growth has been pretty good so far, sales of most Indian companies has yet to pick up pace. This can be seen from the fact that while profits (for the 447 companies from our universe that have announced their results so far) have grown by 24% YoY during the quarter, this has come on the back of just 11% YoY growth in sales.

* Performance of 447 companies from our universe that announced results until last week;
Source: Equitymaster Research

So what reason can we attribute for such a strong growth in profits for India Inc? And is this growth really sustainable or is it just due to a one-time impact of the government stimulus?

The answer to the first question is clear. This quarter's profit growth has largely been on the back of cost cutting from a whole host of companies. Some have seen their staff costs come down. Some have benefited from lower interest payments. And then there are others who have see their raw material costs come down owing to the lower commodity prices (on a YoY basis). Overall, it has been lower cost than higher sales that have led to this strong rise in profits for India Inc in the December 2009 quarter.

Coming to the second question - is this growth sustainable or is it just due to a one-time impact of the government stimulus? Yes and no!

Given that this growth in profits has come largely on the back of cost cutting by enterprises, it isn't sustainable in this form. We mean companies can cut costs only to a certain level to growth their profits. This cannot go on for long. The more businesses cut costs (like by firing employees or freezing pays) the more their sales go down, because consumers (who are also their employees) have less money to spend. We are already seen pay hikes coming back to IT companies.

Then, if are to go by the hints coming out of the RBI, the government's stimulus measures have also helped create such a strong growth in profits for Indian companies. This is especially true of sectors like real estate where the government's policies did not let some companies go bankrupt despite their inability to pay off their heavy debts. The RBI's own low interest rate regime has helped debt-heavy companies restructure their loans.

But this cannot continue for long. The RBI's latest CRR hike stance indicates this. And the central bank has also advised the government to mend its ways and start the process of exiting the stimulus. Otherwise, while Indian companies will enjoy some good times in the short run, they will see the pain postponed for later days.