IT stocks bring some cheer
Closing

After the weakness the Indian markets have seen for the past few days, it seemed that today would be no different. But that was during the opening hour. As trading progressed, the markets moved up, led by gains in IT, auto, and telecom stocks.

The BSE Sensex and NSE Nifty closed with gains of around 110 points (0.7%) and 25 points (0.6%) respectively. Mid and small cap stocks followed suit. The BSE Midcap and BSE Smallcap indices closed higher by 0.3% and 0.5% respectively. Rupee was trading at 46.65 against the US dollar at the time of writing.

IT stocks were amongst the biggest gainers today. The BSE-IT index gained 2.5%. Heavyweights like Infosys and TCS were in the limelight. This comes after the last few days of weakness that these stocks had seen. Industry experts believe that the worst seems to be over for the Indian IT sector. That is what we can also infer from the performance of the top four IT companies during the quarter ended December 2009. Improving volumes coupled with stable pricing has infused a new confidence in them. Better customer sentiment emanating from previously plagued industries and geographies is also fueling new hopes.

However, when it comes to the stocks of most of the IT companies, valuations do not paint a rosy picture. With a sharp rise in stock prices over the last 9-10 months, most of the stocks from the sector are already factoring this recovery. Additionally, there is a looming concern of currency volatility impacting IT companies' margins going forward.

Realty stocks, led by DLF, HDIL, and Unitech bucked the trend today and closed weak. Stocks from the realty sector have been mired under several issues over the past few months. Prominent amongst them is the subdued demand for commercial and residential real estate. Given the stimulus in the form of restructured loans that these realty companies benefited from last year, they did not lower their property prices expecting the recovery to help them with higher demand for their projects. However, while recovery happened in the broader economy, realty buyers have largely remained on the sidelines owing to prevailing high prices in several pockets of the country (Mumbai being a prime example).

In fact, some experts like Deepak Parekh of HDFC believe that residential property prices have again reached bubble levels. And he has warned that if prices rise further from here on, sales will freeze. But are the realty companies listening?

Auto stocks were in favour today. Key gainers included Bajaj Auto and Hero Honda. However, car manufacturers like Maruti closed in the red. Earlier, a report on the Wall Street Journal suggested that India's car makers have reported their highest ever monthly domestic auto sales during the month of January 2010. The reported sales volumes show an increase of 32% YoY. During the month, these stood at about 145,000 units as reported by the Society of Indian Automobile Manufacturers (SIAM). The previous high stood at about 130,000 units.

Auto stocks have in fact been quite in demand not only today but over the past year or so. While the BSE-Sensex has garnered returns of about 60% since the beginning of last year (January 2009), the BSE-Auto Index has risen by about 170% since then. There are a variety of reasons for the same - lower input costs, cheaper and easier availability of loans, the overall economic recovery, a low base effect, amongst others. However, with the economic stimulus likely to be withdrawn gradually, and an expected rise in interest rates and input costs, there is a big question mark on whether the auto sector will witness a similar kind of trend during the next financial year as well.

Maruti bucks the trend
01:30 pm

Persistent buying activity led the Indian market to continue their upward movement during the previous two hours of trade. While buying activity is being witnessed in stocks across sectors, those from the realty and consumer durables sectors are bucking the trend. Stocks from the IT, telecom and auto space continue to lead the pack of gainers.

The BSE-Sensex is trading up by around 115 points (0.7%) and the NSE-Nifty is up by around 35 points (0.8%). Currently, the BSE-Midcap and BSE-Smallcap indices are trading up by 0.4% and 0.6% respectively. The Rupee is trading at 46.63 to the Dollar.

Telecom stocks are currently trading firm led by Bharti Airtel and Idea Cellular. A leading business daily has reported that Bharti Airtel is launching its application stores (known as APP Stores) tomorrow. This will make it the first Indian company to enter this space. This venture allows mobile users to download and use the various kinds of applications offered by the respective provider. Bharti is expected to go live with about 1,200 applications. This, however, is a very small number when compared to global majors (considering that there are no players in this space present in India). For instance, BlackBerry's APP store offers over 4,000 apps, while Google's Android offers over 20,000 apps.

However, this move by the Indian telco is towards its long term strategy - to increase the contribution of its non-voice revenues. As per Gartner, app stores globally raked in over US$ 4.2 bn in revenues last year. It expects this figure to rise to about US$ 30 bn by 2013. It must be noted that this concept has not really taken off in India till now. However, Bharti Airtel's management expects it to do well on the back of it offering applications independent of handsets and operating systems.

Auto stocks are currently trading firm led by Hero Honda, Tata Motors and Eicher Motors. The stock of Maruti Suzuki is however trading weak on the back of its management expecting tough times ahead. A leading business daily has reported that the company's management is expecting margins to come under pressure during the next fiscal. The reasons for the same are the rising input costs as also the withdrawal of the government's incentive programs. The company's management is not able to give an indication as to what the margins would look like in the next year. However, it is sure of the same being volatile from the current quarter. During the quarter ending the company reported an operating margin of 15.1%, which is way higher than that of 6.4% in 3QFY09. As for 9mFY10, operating margins stood at 13.4% as compared to 9.6% during 9mFY09.

Considering that auto sales volumes have been touching new highs month after month, the Indian growth story in automobiles does remain intact. However, we do believe that factors such as the intensifying competition (both domestic and international players) and rising interest costs coupled with the reasons mentioned above may impact domestic auto companies, including market leader Maruti.

IT, telecom aid the rise
11:30 am

After starting on a weak note, the Indian stock markets managed to rise above the dotted line during the previous two hours of trade. Currently, stocks from IT, telecom, auto and FMCG sectors are managing to garner investors' interest. However, selling activity is being witnessed in oil & gas and realty sectors.

The BSE-Sensex is trading up by around 89 points and the NSE-Nifty is up by around 28 points. Currently, the BSE-Midcap and BSE-Smallcap indices are trading up by 0.5% and 0.7% respectively. The Rupee is trading at 46.66 to the Dollar.

According to a leading business daily, the RBI is planning to de-regulate all lending rates from the coming fiscal. It plans to scrap the system of lending linked to the benchmark prime lending rate (BPLR) and replace it with a base rate, which will be the minimum rate at which banks will be allowed to lend. This move will be a step towards freeing of lending rates for loans to small and medium enterprises as well as export and farm sector.

It may be noted that BPLR lending had issues like lack of transparency as 70% of the bank lending were below the BPLR. Many a times the banks were borrowing funds at higher rates and were compromising on the loan pricing so as to encourage credit offtake. By doing this they compromised on risk provisioning for possible slippages. This system was also less responsive to the changes in monetary policy as banks continued with higher prime lending rates despite monetary easing by the RBI. The BPLR system also transmitted as fairly higher rates making loans inaccessible to weaker sectors. The public sector banks were at a major disadvantage as they usually charged lower lending rates as against their aggressive private sector peers. We believe that the new base-rate lending regime will do well in overcoming the previous shortfalls along with making loans available to the needy.

As per a leading business daily, Indian apparel major Raymond, is focusing on its retail business with the aim to increase its revenue from this stream by 40% in the next two years. The company presently earns around Rs 10 bn from its retail business, around 70% of its topline. The company plans to expand retail business by opening another 300 stores majorly in the smaller towns. Raymond currently operates 500 stores, 80% of which are on the franchise basis. Though the opportunities for branded apparel look lucrative in the growing tier II and tier III cities in India, Raymond will bear higher cost of operating the extended retail network which may continue to impact the company’s bottomline in the medium term.

Markets begin on a choppy note
09:30 am

The Indian markets have started today's session on a choppy note. The benchmark indices opened below the breakeven mark and have just managed to break into the positive territory. Other key Asian markets are trading in the red with Indonesia (down 1%) leading the pack of losers. The US markets closed lower by 1% yesterday.

Currently in India, heavyweights from the NSE-Nifty are trading a mixed bag with metal and software stocks witnessing buyers' interest. However, banking heavyweights are in the red. The BSE-Sensex is trading higher by around 20 points, while the NSE-Nifty is up by about 10 points. Marginal buying interest is also being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.3% and 0.5% respectively. The rupee is trading at 46.73 to the US dollar.

Auto stocks have opened the day on a mixed note. Gainers here include Eicher Motor and M&M. However, Hero Honda is in the red. As per a leading business daily, M&M and UK's BAE Systems will invest more than US$ 21 m in three years into their joint venture (JV) company, Defence Land Systems India. The foreign investment promotion board has approved the investment. M&M holds 74% stake in the JV. It will be headquartered in New Delhi and will have a manufacturing facility near Faridabad in the National Capital Region. It will manufacture Axe high mobility vehicle, up-armoured and bulletproof Scorpios, Boleros, Rakshak, rapid intervention vehicles and the Marksman light-armoured vehicle. The JV will also develop a mine-protected vehicle specifically for the Indian defense forces. In our view, the JV must be viewed as M&M's progression towards being a complete auto player from being a predominantly utility vehicle and tractor manufacturer.

Pharma stocks have opened the day on a mixed note. Gainers here include Ranbaxy and Panacea Biotech. However, Dr. Reddy's is in the red. As per the data from drug sales tracking agency, ORG-IMS, Cipla was the leading pharma company in the domestic market during 2009 with a market share of 5.4%. It is followed by Ranbaxy (4.9%) and GSK Pharma (4.4%). Cipla has a basket of 924 products as compared to Ranbaxy's 565 and GSK's 177 products. They are followed by Piramal Healthcare (4.1% market share, 750 products), Zydus Cadila (3.7%, 735) and Sun Pharma (3.6%, 516). The domestic pharma market grew by 17% YoY during 2009. Cipla posted a growth rate of 18%, while Ranbaxy and GSK grew by 14% and 18% respectively.

A bigger problem for India lies in store
Pre-Open

The global economy crumbled and slowed down India's growth in FY09. Monsoons failed to leave a mark and hampered agriculture. Food prices soared but so did the stockmarkets and liquidity. Amidst all this, the central bank (RBI) remained wary of raising interest rates fearing that it would thwart India's growth. However, it did resort to raising the reserve requirements of banks in its recent monetary policy.

Despite all this, as reported on Bloomberg, India's economy is expected to grow by 7.2% in FY10. This is after recording growth of 6.7% in FY09. This could probably leave the Finance Minister Pranab Mukherjee more headroom to consider withdrawing the fiscal stimulus.

Just a week ago, India's chief statistician Pronab Sen had stated that the Indian government may not exit the stimulus measures anytime soon. Sen acknowledged that the industrial recovery in India's US$ 1.2 trillion economy was 'on track.' But he opined that the government could wait for economic data until March before it starts to remove any stimulus.

Meanwhile, India's rising fiscal deficit remains a problem. The deficit soared to 6.2% of GDP in FY09. It is projected to account for 6.8% of GDP this fiscal year. The longer the government waits for clear signs of recovery, the harder it will be for it to bring the deficit under control. At present, keeping India's GDP growth intact may be the topmost priority for the government. But sooner or later the bloated fiscal deficit could turn out to be a much bigger problem.

A mixed quarter for Indian pharma
The recently concluded December 2009 quarter was a much better one for Indian pharma companies. For the generics players, the scenario in the US market improved a bit. In the previous quarters, many the domestic pharma companies faced the problem of delay in product approvals. Also, there were many companies then which had come under the scanner of the US FDA. In the December quarter, however, the number of product approvals increased. Not all companies were able to resolve their issues with the US FDA, barring Lupin. At the same time there were no fresh cases reported either. Further, sales in the domestic and the semi-regulated markets also picked up.

However, for companies whose exports strategy revolved around CRAMS, all was not hunky dory. This is because many smaller global innovators and biotech firms chose not to continue with some of their research projects. This reduced the amount of work that could be outsourced. Further, the inventory rationalization exercise of many of these companies was not over. All this had a significant impact on sales and profits of CRAMS players. On the profitability front, there were differences. At the operating profit level, performance was mixed. But most companies reported a significant growth in net profits due to reduction in interest costs and considerably lower forex losses.

The next few years are expected to be bumper years for generics players . This is because drugs having considerable value are scheduled to lose their patents. In 2010, branded drugs with US$ 24 bn in global sales face possible competition from generics. According to Bloomberg, that number in 2011 stands at US$ 42 bn. Readers would do well to recall that the last large wave of patent expirations came in 2006 and 2007.

During that time, branded drugs generating sales of US$ 43 bn faced generic competition. In the current wave, 2 big drugs to lose patents are cholesterol reducing 'Lipitor'. It is the world's largest selling drug (sales of around US$ 12 bn). The other is blood thinning drug 'Plavix' (sales of US$ 9 bn). Thus, according to IMS data, in total, drugs worth US$ 109 bn in sales face competition in the next four years. This signals huge opportunity for Indian generics players despite the increased competition in the US generics market.