Banks, energy play spoilsport
Closing

Heavy selling pressure led to the markets slipping back into the negative territory during the closing hours of trade and thus, ending the day in the negative. While Sensex closed lower by around 120 points today (down 0.8%), decline in NSE Nifty was seen at around 40 points (down 0.7%). BSE Midcap and Small cap indices also came off their day’s highs and closed virtually flat today. Advance to decline ratio on the Sensex was heavily in favour of the latter today with four stocks declining for every one that gained.

While majority of the Asian indices closed in the positive today, Europe is also witnessing buying interest currently. The rupee was seen trading Rs 46.6 to the dollar at the time of writing.

Greece is doing to global asset markets what Dubai did to them few months back i.e. keep them on the edge. However, those fears were diluted a bit today amidst speculation that the European nation would indeed be given aid of some kind and not allowed to fail. Certainly, with the global economy far from being able to stand on its own feet, an event like Greece defaulting on its debt indeed has the potential to push it back into the depression era. Thus, it looks like the authorities will do whatever it takes to save Greece. And this confidence manifested itself across most stock markets today as they staged a strong rally. Indian markets though fell behind as problems with some of its own corporate heavyweights in the energy and banking space took centre stage and investors chose to ignore the Greece bailout story.

The cement pack was amongst the surprise gainers today with most big companies like Ultratech Cement Madras Cements and India Cements witnessing strong buying interest. The optimism towards these counters was fueled by a report in a leading daily that despatches during January touched a new monthly high. The industry sold nearly 18.2 m tonnes of cement during the month, beating previous high of 18.1 m tonnes registered during March 2009. On a YoY basis, the growth rate stood at an impressive 12.8%. It is not just the volumes that are showing strength, even cement prices have been on a high with most manufacturers hiking prices by Rs 3-5 per kg from the start of the current month. Thus, with both volumes as well as realizations showing buoyancy, cement counters were witness to heightened activity during today’s trading session.

Iron ore miners like Sesa Goa and GMDC were amongst the other prominent gainers from the BSE A group today. Interest in these counters gained traction on the back of news that Brazil, world’s second largest exporter of iron ore is looking to levy additional duty on iron ore exports so that domestic manufacturing of steel can be boosted. This is obviously good news for Indian ore exporters as the gap left by Brazil’s exports to major ore consuming nations like China could be expected to be filled up by India. However, some experts have ruled out any such benefits accruing to Indian ore exporters. For one, there aren’t adequate infrastructure facilities to handle increased exports from India and secondly, the Indian government too is looking to levy similar tax on exporters, which would make Indian ore less cost competitive as compared to say the Australian ore. Given this backdrop, the rally in mining stocks comes as a bit of a surprise.

Markets back in the green
01:30 pm

Indian markets have recovered from the day's lows in the last 2 hours and are now trading above the dotted line. While all sectors are trading in the green, the star performers are stocks from the realty and consumer durables sectors with stocks from the FMCG space showing the least gains.

BSE-Sensex having recovered from the day's lows is trading positive by 50 points while NSE-Nifty is higher by 23 points. BSE-Midcap Index is trading higher by 79 points while the BSE-Smallcap index is higher by 124 points. The rupee is trading at 46.52 to the US dollar.

According to a leading newspaper, the government is planning to spend Rs 100 bn on e-governance projects in 2010-11. This is thrice what is being spent in the current year and is potential a bonanza for IT companies. Under the National e-governance plan, the ministry has identified 27 mission-mode projects which together have a spending budget of Rs 230 bn. Industry body Nasscom has projected that the business opportunity in e-governance over the next three years is worth US$ 9 bn. This provides a huge opportunities for IT companies like TCS, Infosys and Wipro which have already set up dedicated units to tap into this opportunity. So far five projects have been awarded while the biggest is the Unique Identification project headed by former Infosys chairman Mr. Nandan Nilekani. While the allocation of these projects are running behind schedule, we expect this opportunity to help IT companies tide over the loss of business due to the economic slowdown in US and Europe.

French FMCG giant Groupe Danone has entered the Indian market with flavored milk. This is the first product by the company after a prolonged battle with the Nusli Wadia Group. The product branded Danone Choco Plus milk, priced at Rs 15 for a 200 ml tetra pack is being test marketed in Hyderabad before a national launch. However, the company is not in a hurry for a national launch as it wants to test the waters first and get its product right. The product will be taking on Amul's Kool, Nestle's Milkmaid Funshake and Britannia's Actimind Choco Plus. The milk beverage market is currently small, valued at Rs. 2 bn but growing fast. Danone India has plans of investing Rs 3.3 bn in India over the next few years. We see Danone's entry in the Indian markets as the start of tough times for companies in the dairy space.

Midcaps and small caps outshine
11:30 am

After opening on a positive note, the Indian markets quickly slid back into the negative on account of profit booking among index heavyweights during the previous two hours of trade. However, buying activity among consumer durables, realty, metal and auto stocks is trying to cheer up the markets. Currently, selling activity is being witnessed in sectors like banking, FMCG, capital goods and power.

The BSE-Sensex and the NSE-Nifty are currently trading lower by around 47 points and 20 points respectively. Stocks from the midcap and small cap spaces have managed to buck the trend, with the BSE-Midcap and the BSE-Smallcap indices trading higher by 1.1% and 1.3% respectively. The rupee is trading at 46.59 to the US dollar.

According to a leading business daily, India's second largest commercial vehicle manufacturer, Ashok Leyland is looking to recoup its Rs 11 bn worth capital investment in its Pantnagar plant in the next 4 years all through savings on excise duty. It may be noted that as an incentive to promote industry in the northern state of Uttarakhand, the auto makers that set up manufacturing units there are exempted from 8% Central excise duty for 10 years. Moreover they are also offered an income tax holiday for the first five years and a 30% discount for the next five. The company expects this saving to help it recoup all of its capital expenditure in bringing up this plant which has an annual capacity of 50,000 units. We believe that the company which had a single truck manufacturing facility only in Hosur will also gain in terms of cost savings by being closer to the markets in the northern, western and eastern India.

Power Finance Corporation is planning to focus more on private business and will float two new subsidiaries in the short term. The company plans to hive off its renewable energy business and consortium lending in early next fiscal in order to leverage the current investment boom in green energy projects and diversify its asset base. It may be noted that lately the government is ramping up private participation in large power projects. As a result the contribution of private sector projects in the country’s installed power generation capacity is expected to grow to over 16% by March 2012 from 12% witnessed at the end of the Tenth Plan Period i.e. March 2007. PFC plans to capitalize on this growth by forming the syndication required to finance big power projects. It finances around 25% to 35% of the overall project costs to the private sector and around 80% to the public sector power players. We believe that a focus on these areas will further aid the company in sustaining reasonable margins and good asset quality going forward.

Markets begin on a firm note
09:30 am

The Indian markets have started today's session on a firm note. The benchmark indices opened above the breakeven mark and have managed to stay in the positive territory despite downward movements. Other key Asian markets are trading in the green with Taiwan (up 1.4%) leading the pack of gainers. The US markets closed higher by 1.5% yesterday.

Currently in India, heavyweights from the NSE-Nifty are trading a mixed bag with metal, software and auto stocks witnessing buyers' interest. However, FMCG and power heavyweights are in the red. The BSE-Sensex is trading higher by around 37 points, while the NSE-Nifty is up by about 11 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 0.8% and 1% respectively. The rupee is trading at 46.55 to the US dollar.

Auto stocks have opened the day on a strong note. Gainers here include TVS Motor and Eicher Motor. As per a leading business daily, the joint venture between M&M and Renault, will be revamped. Mahindra Renault manufactures the Logan sedan from Nashik. M&M holds 51% stake in the venture. It has been making losses resulting in a diminution in Renault's brand value. In our view, this development is an effort by Renault to protect its brand name at a time when it is rolling out its products and marketing set up independently in India. It may be noted that most global auto companies are now eyeing the Indian auto markets, which is among the few growth stories for the industry worldwide.

Engineering stocks have opened the day on a positive note. Gainers here include Crompton Greaves and Engineers India. As per a leading business daily, engineering major L&T is set to enter the general insurance sector after receiving the initial approval from the Insurance Regulatory and Development Authority (IRDA). There are three stages of approval required for getting a licence for an insurance company. R1 is the preliminary approval. In R2, IRDA looks into the business model of the company and in R3, it looks at the formation of the company. L&T has received R1 approval so far and will require around three to four months to start the venture. There are currently 22 non-life insurance companies in India currently and the competition is already intense.

Will India be any different?
Pre-Open

Dubai crumbled under the pressure of debt for its multi storied towers. Greece, Portugal, Spain and Italy are giving creeps to investors in Eurozone thanks to their possibility of sovereign default. Unlike the US' twin deficit, China's twin surplus is not letting the dragon economy breathe any easier. The country's excessively overvalued property markets are challenging its super power status in world economy. The US' multi trillion dollar deficit is expected to ruin global growth prospects given the magnitude of pullback. Thus taking a call on the economy is best left to speculators these days. What investors can do is to check if the regulators are not sleeping over the problem.

Indian investors need to keep an eye on three of them. The RBI, which more or less regulates and supervises all Indian financial markets. The SEBI, which controls the capital markets. And the Ministry of Finance, which is the government's arm for formulating and executing policy matters related to the broader economy.

Each of these regulators needs to ensure that India does not repeat the mistakes made by its peers in the West and China. Growth based on easy liquidity works well when the nation's debt is fairly low and economic growth is relatively strong. But exponential debt financed growth becomes an increasing concern every time you print your way out of an economic downturn. Thus the RBI has in recent past and will in future need to stay independent in its views with regard to monetary tightening. In fact, it needs to stress even more on tightening the government's borrowing budget.

The central bank also needs to adopt a stricter stance with regard to allowing sops to sectors that have misused the sops. The realty sector is a case in point. The RBI has already refused further restructuring of loans to this sector. In effect, it expects realty players to stop holding on to projects with the intent of driving up prices.

The SEBI will need to ensure that money without the intention of long term investment in the economy does not remain a frivolous guest by way of participatory notes (P Notes). The Finance Ministry's decision to keep the issue of taxing P-Notes on the back burner for now does not go well with this intent. Capital controls, if and when needed, will have to be put in place in coordination with the RBI to ensure stability of the currency.

The larger the downturn, the larger is the response. If the recovery period is not used to pay down debts the problems can become exponentially worse. Thus as suggested by the Finance Ministry, India needs to immediately start unwinding its stimuli to ensure than inflation does not rear its ugly head. Going back to the FRBM (Fiscal Responsibility and Budgetary Management) targets seem most apt at this time. Unless checked on time, the problems faced by the heavy indebted governments could soon dawn upon India as well.