'Realty' bites as markets crash
Closing

In what can be termed as a turnaround of sorts, though in the negative sense, the Indian markets fell deep into the negative after trading with strong gains during the first half of today's session. Selling was rampant across stocks from the banking and realty spaces, possibly on the back of fears of a rise in broader interest rates within the country. Indian markets were in fact the worst performer in Asia today, where gains were seen in Japan (up 1.6%) and Hong Kong (up 0.1%).

The BSE Sensex and NSE Nifty closed with losses of around 190 points (1.2%) and 75 points (1.5%) respectively. Mid and small cap stocks followed suit. The BSE Midcap and BSE Smallcap indices closed lower by 1.2% and 0.8% respectively. Rupee was trading at 46.3 against the US dollar at the time of writing.

Power sector stocks closed weak today. Key losers here included PTC, Neyveli Lignite, and NTPC. NTPC was in fact also amongst the biggest loser on the Sensex. This may well be attributed to the discount at which the government is offering the stock through a follow-on public offer (FPO) that opens tomorrow. As against its earlier plans of raising around Rs 110 bn through divesting a 5% stake in the company, the government now hopes to collect less than Rs 90 bn. And that probably hurt sentiment towards the stock today.

Capital goods stocks also closed weak today. Some major losers here included Praj, Suzlon, Thermax, and Punj Lloyd. Heavyweights like BHEL, L&T, and Siemens also closed weak. As per a report appearing on the Wall Street Journal, Siemens India's global parent - Siemens AG - is planning to ramp up the former's presence in the country. The focus will be green energy and manufacture of a range of other engineering products for sale in the domestic as well as export markets. Siemens AG's chief has in fact talked of investing Rs 16 bn over the next three years and significantly raise Siemens India's head count to meet its growth objectives in the country.

Given the kind of opportunities for engineering companies that India presents, this move from Siemens is not surprising. With investment opening up in sectors like power plants, telecom networks, roads, ports and highways, most global engineering firms are trying to establish a greater presence in the country. However, these firms face thinning margins given the intensity of competition. Apart from that, timely execution also remains a key problem.

Energy stocks closed mixed. While gains were seen in Gujarat Gas and HPCL, selling marked trading in GAIL and BPCL. Oil & gas exploration major, ONGC, which announced a huge capex plan today, closed in the positive. The company is looking to spend around Rs 260 bn during the next financial year (FY11) to shore up its oil & gas presence. This is higher than the earlier plan that ONGC had of spending Rs 240 bn for expansion, exploration and modernization.

Markets continue to be weak
01:30 pm

Indian markets while having recovered from the day's lows are still showing signs of weakness. At present, the markets are trading close to the break even. Companies in the metals and consumer goods space are attracting investor interest while profit booking is being witnessed in the bank and oil and gas space.

BSE-Sensex having recovered from the day's lows was trading positive by 11 points while NSE-Nifty was lower by 8 points. BSE-Midcap Index is trading higher by 40 points while the BSE-Smallcap index is higher by 116 points. The rupee is trading at 46.21 to the US dollar.

Havells India Limited released its quarterly results and took the market by surprise with an impressive 5 fold increase in its bottom-line. While the top-line for the company grew by 22% YoY, the company benefited from low costs of plastics and metals as compared to last year. This helped boost segmental margins across all its business resulting in operating income growth of 264% YoY. However, during 3QFY09, there was a significant loss due to inventory correction. When adjusted for this one time provision, the operating income is seen to grow by only 33% YoY. With the company's focus on growing its top-line along with profitability and the restructuring of its overseas subsidiaries, lead us to believe that Havells has good potential for growth going forward.

Suzlon is looking to liquidate its 26% stake in Hansen. The company had acquired a 100% stake in Hansen for Rs 25.11 bn in 2006. The rationale behind this investment was to ease input supplies. Hansen is a manufacturer of gear box which is a vital component in wind turbine. However, recently the supply of this component has eased with companies in Europe and US expanding their outputs. Suzlon expects to receive about US$ 400 - 500 m from this sale and plans to repay its debt from the money received. The company currently has Rs 105 bn debt on its books. Suzlon still has a very high operating as well as financial leverage which in our opinion makes the company a risky proposition for investment.

Energy stocks lead the decline
11:30 am

The Indian markets shed a substantial part of their early morning gains during the previous two hours of trade. While metal and realty stocks continue to attract investors’ interests, stocks from the banking and oil and gas space were responsible for the fall during the early session.

While the BSE Sensex is trading higher by 20 points (or 0.3%), the NSE Nifty is marginally down by 5 points (or 0.1%). The BSE-Midcap and BSE-Smallcap are also trading higher by 1% and 1.8% respectively. The rupee is trading at 46.24 to the dollar.

Power stocks are currently trading firm led by CESC, Torrent Power and Tata Power. Power major, NTPC announced its 3QFY10 results recently. The company’s revenues for the quarter fell by 1% YoY. This was on the back of lower realisations, which were seemingly on the back of passing on the lower fuel costs to its customers. However, these lower fuel costs helped the company expand its operating margins, and hence record a good operating performance. During the quarter, the operating margins stood at 30.1%, higher by 1.6% YoY. Apart from lower fuel costs, lower staff costs (both as percentage of sales) aided the margins as well. These factors led to a 5% YoY increase in operating profits. The growth at the bottomline level stood at 5% YoY as well. As for the performance during 9mFY10, the topline and bottomline were higher by 12% YoY and 10% YoY respectively. During the quarter, NTPC commissioned a 490 MW capacity plant at Dadri (UP), which increased its total generation capacity to above 31,000 MW by the end of December 2009.

Cement manufacturers have reported good set of numbers for the quarter ended December, 2009. The growth has been driven by driven by increased demand from housing sector, especially of low-cost homes, and infrastructure. Generally, cement sales start picking up from January and the peak period ends with the arrival of the monsoons in June. While the industry is likely to report double digit volume growth of 10% in FY11, upcoming capacities are likely to exert pressure on margins. The industry capacity in FY09 was 204.8 m tones. By the end of FY10, the industry capacity is expected to reach size of 270 MT, an addition of nearly 65 MTPA. However, the annual demand is expected to rise by 20 MTPA to 198 MT and in FY11 it is expected to be 220 MT.  Thus, the cement industry is likely to witness an excess capacity scenario in the medium term, which will impact realization and growth in earrings of the cement manufacturers.

Metal, realty stocks take markets higher
09:30 am

The Indian markets have started today's session on a strong note. The benchmark indices opened above the breakeven mark and have managed to hold on to their gains since then. Other key Asian markets are trading in the green with Japan (up 1.9%) leading the pack of gainers. The US markets closed higher by 1.2% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading in the green with metal and realty stocks finding favour. The BSE-Sensex is trading higher by around 120 points, while the NSE-Nifty is up by about 40 points. Buying interest is also being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 1.4% and 1.9% respectively. The rupee is trading at 46.3 to the US dollar.

Aluminium stocks have opened the day on a positive note. Gainers here include Hindalco and Nalco. As per a leading business daily, Hindalco plans to produce cans for beverages and food giants from its plant at Hirakud, Orissa. In fact, it has begun dismantling a closed plant of Novelis in Britain and intends to ship all key equipment to Hirakud. The process is likely to be completed by October 2011. It may be noted that Novelis is the world's premier maker of aluminium rolled products, used for making cans. Hindalco acquired Novelis for US$6 bn in 2007. In our view, the shift stems from the fact that Indian aluminium companies are the lowest cost producers anywhere in the world. However, shipment of cans from Hirakud to overseas markets will have a component of transportation cost. Hindalco is expanding its smelter capacity in Hirakud to 231 kilotonnes per annum which will be completed in October, 2012.

Auto stocks have opened the day on a positive note. Gainers here include Eicher Motor and TVS Motor. As per a leading business daily, India's largest carmaker Maruti Suzuki will not pass the benefits of lower taxes for the new petrol variant of Swift to customers. Swift is the company's most popular compact model. It will save around Rs 40,000 per car due to a lower excise duty for the model's smaller engine. But given the spike in input costs, the company is departing from its past tradition of passing on cost savings to customers. In our view, it is not difficult to understand the pressure auto makers are facing due to rising commodity prices. Maruti could also be keeping the lower price move for a later date when a series of small cars are expected to hit the market. But it does make life difficult for industry bodies that lobby with the government for tax concessions with the argument that eventually they will be passed on the customer.

More doom awaits the US economy
Pre-Open

Nouriel Roubini is back to doing what he does best: predicting more gloom for the US economy. And we know that he has been accurate in his predictions in the past. In fact, the noted economist in 2007 had correctly predicted a 'hard landing' for the US economy. What followed thereafter is well entrenched in the annals of history.

This time around, Roubini maintains that US growth outlook remains 'very dismal'. This is despite the fact that there have been some signs of recovery evident in the global economy. As reported on Bloomberg, Roubini believes that more than half of this growth was related to a replenishing of depleted inventories. Therefore, that consumption was reliant on monetary and fiscal stimulus. And so, he says, as these measures recede, the growth rate will slow down in the second half of 2010.

His view is reiterated by Lawrence Summers, a former US Treasury Secretary. Summers believes that the US GDP growth will continue to grow at a moderate pace. His biggest concern is the rising unemployment in the economy which stands at 10% currently. The stimulus packages announced by the Obama administration have to a certain extent perked up growth. But it obviously has not been enough to improve the employment scenario.

So far, the US government has not been able to come out with any concrete solution to this very difficult but important problem. And all this at a time when a debate has already started raging about the timing of exiting the stimulus measures. US' gargantuan deficit position means that its government will have to take a call soon on when to start exiting these measures. Otherwise, the debt situation is most likely to spin out of control.

But the stubbornly high unemployment rate means that the exit measures are more likely to introduced later rather than sooner.