Weak global cues hurt India
Closing

Persistent selling activity across index heavyweights led the indices to languish deep in the red and close well below the dotted line in today's trade. While the BSE Sensex closed lower by around 451 points (down 3%), the NSE Nifty lost around 127 points (down 3%). Midcap and small cap stocks were also at the receiving end, notching losses of 3% each. Losses were largely seen in metals, banking and oil & gas stocks.

As regards global markets, most Asian indices closed weak today while European indices have also opened in the red. The rupee was trading at Rs 46.66 to the dollar at the time of writing.

Most pharma stocks closed weak today with Ranbaxy, Wockhardt and Glenmark leading the pack of losers. Ranbaxy closed lower by 5% today. This was seemingly on back of the news that the company has failed to address its issues with the US FDA. The US regulator has asked the company to immediately assess the manufacturing practices at its plants that make drugs for the American market. It must be noted that Ranbaxy was already in trouble when two of its manufacturing plants at Poanta Sahib and Dewas were found to be violating the good manufacturing practices standards of the US FDA in 2008. As if that was not enough, Ranbaxy received another setback when the US FDA issued a warning letter for its manufacturing facility Ohm Laboratories in the US in December 2009. Ohm has meanwhile hired the services of PRTM, a global consulting firm, to provide expertise and advice on issues raised by the FDA. US accounted for around 25% of Ranbaxy's sales in 2008 and is an important market for the company. However, sales from this market have substantially fallen of late due to its impending issues with the US FDA which have been going on for some time now. Unless the company quickly finds some way to resolve these issues, performance of the US business will continue to remain under pressure.

As per a leading business daily Siemens and BEML Ltd have entered into an agreement to jointly manufacture and market stainless steel coaches for suburban rail systems. As per the terms of the contract, Siemens will manufacture high-performance bogies and the three-phase IGBT (insulated gate bipolar transistor) propulsion system, which it is already supplying to Railways. BEML, meanwhile, will make stainless steel EMUs (electric multiple units). Further, the two companies will jointly bid for purchase orders from Indian Railways and suburban train operators such as Mumbai Railway Vikas Corporation Ltd. It must be noted that in the December 2009 quarter, the company's mobility (transportation) segment witnessed a growth of 40% YoY in sales with 11% YoY growth in PBIT margins. Not just that, the company will also be able to capitalise on the growing demand for EMU coaches in major cities which are expanding their suburban rail networks. However, the stock closed lower by 3% today.

As per reports, the IMF has urged India to begin fiscal consolidation with the next budget given that India's fiscal deficit has soared due to various stimulus measures introduced to bolster the economy. It must be noted that India's fiscal deficit surged to 6.2% of GDP in FY09 and the government had pegged this deficit at 6.8% of GDP in FY10. Given that India has started displaying signs of recovery and is growing at a stronger rate than the developed world, the IMF is of the opinion that it is the right time to withdraw the stimulus. However, this may not happen anytime soon. This is because the chief statistician Pronab Sen has stated that India may defer taking a call on exiting stimulus measures and the finance minister could take appropriate steps later in the next fiscal year. Indeed, after the global economic meltdown and the serious problems that it posed, dealing with such a high fiscal deficit is the next big issue that the government will have to tackle going forward.

The bears continue to rule
01:30 pm

Selling activity has forced the benchmark indices to move deeper into the red during the previous two hours of trade. Currently, extensive selling activity is being witnessed across the board led by stocks from the realty, metal, and banking sectors.

The BSE-Sensex is trading lower by around 440 points and the NSE-Nifty is down by around 135 points. Midcap and small cap stocks too are bearing the brunt of profit booking. Currently, the BSE-Midcap and BSE-Smallcap indices are trading down by 2.9% and 3.3% respectively. The Rupee is trading at 46.52 to the Dollar.

Cement major Ambuja Cements announced its full year CY09 results yesterday. Its revenues grew by 13% YoY largely led by higher volumes and realisations. The company reported 6% YoY growth in sales volume during CY09. While operating profits grew by 7.5% YoY, EBITDA margins contracted by 1.4% as cost of operation grew at a faster rate as compared to the topline. Net profits declined by 12% YoY, despite higher other income and lower interest cost. This is because of absence of extraordinary income. Excluding extraordinary income, the bottomline reported a 12% YoY growth. The company's Board of Directors have recommended a final dividend of Rs 1.2 per equity share. It may be noted that the total dividend for the year along with interim dividend works out to Rs 2.4 per equity share. This translates into a dividend yield of about 2.4% at the current levels.

The prospects of the cement sector for the long term remain intact. This is mainly on account of government initiatives in the infrastructure and housing sectors that are likely to be the main drivers of growth for the industry in the long run.

It what may come as a delight to Indian power equipment manufacturers, the Central Electicity Authority (CEA) has now made it compulsory for winning bidders to order core equipment for supercritical power plants from indigenous manufacturers. It will implement this by asking state and central utilities to incorporate an ‘indigenous manufacturing clause' for all equipment bids. This will effectively shut out Chinese equipment manufacturers. Chinese power equipment companies have been the bane of their Indian counterparts, as their products are 10% to 15% cheaper. Interestingly, this move comes on the back of another recent move by the empowered group of ministers barring the import of supercritical power plants for future ultra mega power plants (UMPP). Apart from BHEL which will benefit from this, numerous other players who are readying their own power equipment capacities in joint ventures with foreign partners will also receive boost of confidence. This includes L&T which has tied up with Mitsubishi Heavy Industries to indigenously manufacture such equipment.

Commodities weigh heavy on indices
11:30 am

Unabated profit booking activity in index heavyweights compelled the benchmark indices to languish below the dotted line during the previous two hours of trade. Currently, extensive selling activity is being witnessed across the board led by stocks from the realty, metal, banking, and consumer durable sectors.

The BSE-Sensex is trading lower by around 366 points and the NSE-Nifty is down by around 108 points. The midcap and small cap stocks are bearing the brunt of profit booking. Currently, the BSE-Midcap and BSE-Smallcap indices are trading down by 2.70% and 2.95% respectively. The Rupee is trading at 46.56 to the Dollar.

As per a leading business daily, India's second largest cement company, ACC is aggressively scouting for acquisition opportunities in order to expand as well as maintain its market share. It may be noted that the company acquired two plants (1 each in Himachal Pradesh and Visakhapatnam) last week. More of such small and mid-sized acquisitions are expected to be done in the current quarter.

The company is planning to acquire 45% stake in Asian Cement in order to strengthen its presence in the northern markets. Asian Cement which has a grinding capacity of 0.3 m tonne per annum (mtpa) in Himachal Pradesh is also setting up additional 1 mtpa capacity there. Though the exact valuations of the company are not revealed yet, it is expected to come at a good bargain as against setting up new greenfield capacity in the area. It is worth noting that setting up a greenfield capacity in the northern region costs around US$ 110 per tonne, almost double the cost in southern India. ACC has 17% market share in the north Indian markets. However, it did not have any plant in the area. It is believed that this acquisition will help the company in saving cost as the lead distance will reduce by 50 to 60 kms.

As per a leading business daily, India's largest engineering company, L&T is planning to redesign its joint venture with EADS, a Franco-German aerospace and defense group in order to clear the foreign direct investment(FDI) hurdle. It may be noted that the government previously rejected the joint venture as it exceeded the 26% cap on FDI in the defense sector. The two companies are now redesigning the equity structure wherein L&T will hold 74% stake in the venture, with the remaining stake left with EADS.

This JV is aimed at tapping the growing opportunities in the Indian defense sector as well as those of other countries. It will make electronic warfare systems, radar instruments and avionics. L&T expects to earn Rs 25 bn in revenues over the next 5 years from this joint venture. It already earns Rs 4 bn from defense business. We believe that this move will augment company's aggressive plans for the Indian defense sector where the government has planned a military procurement budget of over US$ 30 bn over the next 5 years.

Markets stare at another tough day
09:30 am

The Indian markets have started today’s session on an extremely weak note. The benchmark indices opened way below the breakeven mark and have not managed to make any meaningful upward movement since then. Other key Asian markets are trading in the red with Taiwan (down 3.5%) leading the pack of losers. The US markets closed lower by 2.6% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading in the red with construction and auto stocks bearing the brunt of selling activity. The BSE-Sensex is trading lower by around 290 points, while the NSE-Nifty is down by about 100 points. Selling pressure is also being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading lower by 2.7% and 2.9% respectively. The rupee is trading at 46.52 to the US dollar.

Food stocks have opened the day on a weak note. Losers here include Tata Coffee and GSK Consumer. As per a leading business daily, the Rs 10 bn instant noodles market in India is set to witness further competition. After GSK Consumer, which announced the launch of its brand ‘Foodles’, it is the turn of HUL. The FMCG major is set to enter the instant noodles market under its ‘Knorr’ brand. It will initially test market the offering in Western India. Food contributes around 20% of HUL’s business and has grown at 9% during 3QFY10. In contrast, the instant noodles market in India has grown at a much faster rate. That would explain HUL’s interest in the segment. However, in our view, it will take a lot of effort to dent the market share of Nestle’s ‘Maggi’. The company has consistently put in advertising and promotion efforts over the decades due to which it enjoys a 70% market share in the space.

Banking stocks have opened the day on a negative note. Losers here include Bank of Maharashtra and Andhra Bank. As per a leading business daily, banking giant SBI has decided to increase its branch network three fold this decade. It currently has 17,075 branches, which it plans to ramp up to 50,000 by the end of the decade. It may be noted that, in the past, the bank had decided to go easy on branch expansion and concentrate on increasing business from existing branches. But with the government’s permission to hire more employees and liberalisation of branch licensing norms by the RBI for smaller towns, SBI wants to open more branches. In fact, it has opened 975 branches so far this fiscal. In FY11, it plans to open 1,000 new branches. This development must be seen in the light of the rising income levels and the need for financial inclusion in the smaller centres in India.

Investors wake up to the harsh reality
Pre-Open

The writing appears to be on the wall. Yesterday, Dow Jones, the US stock market barometer tumbled 268 points and closed at its three month lows. Things were not rosy at other stock markets either as a broad based selloff took centre stage. It was a combination of a weaker than expected jobs data in the US and sovereign debt issues that spooked the markets. Thus, the gloom that pervaded stocks right through the month of January has prevailed so far in the current month as well. And there seems to be no end in sight. Slowly but surely, the reality that the economic environment, especially in the developed world, is not as good as the stock market rally of 2009 would have us believe seems to be dawning upon investors. In other words, the stock markets had run up way too ahead of fundamentals and now having realized their mistake, seem to be in a correction mode.

So, how long or how deep the correction is likely to be? Frankly, we do not have an idea. In fact, there is a strong possibility of them overreacting on the downside just as they have done on the upside. Indian markets too should not be expected to escape the pain.

However, unlike the developed world, the Indian investor is not staring at an uncertain future and years of sub par growth. It is instead looking at an economy that is likely to remain one of the fastest growing in the world for many years to come. And hence, the investor should pounce upon the opportunity that any significant corrections might present by investing in fundamentally strong Indian companies available at reasonable valuations. Thus, while the investor in the developed world may not know what to do during the deep slump that could come, his Indian counterpart could do well to grab some fundamentally strong counters at attractive valuations.

The focus shifts back to the Yuan
It isn’t that all is lost for the US economy. One way out of the current mess for the US could be to grow its exports. But it may not be easy. They are most likely to run into the Great Wall of China. And the deliberate undervaluation of the Chinese currency is making the US authorities all the more nervous. Little wonder, the US is going all out to try and force the Chinese to undertake a gradual appreciation in the Yuan.

The Chinese though may be in no mood to oblige. It knows quite too well that its export driven economy could come under threat from other emerging nations if there is a meaningful appreciation in the Yuan. And this is the kind of risk the dragon nation may not be willing to take in the current environment. Hence, it would be interesting to see how this battle pans out in the days to come. By all indications, the US is likely to continue to keep stepping up the pressure.