Strong Asian cues buoy India
Closing

Strong buying activity across index heavyweights throughput the session today ensured that the indices closed well above the dotted line. While there were some attempts at profit booking witnessed at higher levels, it was not enough to dent the optimism among participants. While the BSE Sensex closed higher by around 204 points (up 1%), the NSE Nifty gained around 58 points (up 1%). This optimism spilled over to midcap and small cap stocks as well as they notched gains of 1% each. Gains were largely seen in metals and consumer durable stocks.

As regards global markets, most Asian indices closed firm today while European indices have opened on a mixed note. The rupee was trading at Rs 46.04 to the dollar at the time of writing.

As per a leading business daily, engineering major BHEL is expected to sign a memorandum of understanding with Japan's Toshiba Corp. for a transmission and distribution joint venture. This JV is expected to offer turnkey services in India’s power transmission sector and step up focus on the distribution segment as well. Interestingly, BHEL’s move to form this JV comes at a time when the government is looking to add power generation capacity of 78,577 MW by 2012. What is more, revenues from the power segment accounts for around 77% of BHEL’s overall sales. During the December quarter, the power segment sales grew by a decent 19% YoY. Not just that, at the end of December 2009, the company’s order backlog stood at Rs 1,340 bn, which was about 4.8 times its FY09 annual sales. This signals revenue visibility for the future.

However, as is the case with many engineering companies, execution is the key. Therefore, even a swelling order book may not hold weight unless the company focuses on completing projects on time. The stock, along with its peers ABB and L&T, closed firm.

Barring Novartis, MNC pharma stocks closed firm today with the leading gainers being GSK Pharma, Aventis and Pfizer. All these stocks have gained quite a bit since the rally began due to many factors. The first is due to improvement in sales growth as their respective power brands have performed well and maintained market share. Further, certain factors such as trade issues, sale of non-core businesses all of which had impacted sales for a few quarters earlier now seem to be a thing of the past. Most of the companies have also managed to maintain operating margins due to a favourable product mix. The fact that they have strong cash flows and no debt on their books also gives them an advantage. Having said that, most companies have not yet effectively utilized surplus cash on their books and this could have an impact on their return ratios going forward.

In a survey conducted by Reuters and published in a leading business daily, India is expected to gradually exit stimulus measures from the start of FY11, but will still need to borrow a record amount from the market. Further, most of the economists polled are of the opinion that the fiscal deficit could hover around 5.6% of GDP in FY11. For FY10, the fiscal deficit has been pegged at 6.8% of GDP by the government. Gross market borrowing of the government is forecast to rise to a record Rs 4.6 trillion in FY11 from this year’s Rs 4.5 trillion.

Further, the government is likely to raise US$ 6 bn by selling stakes in state-run companies. However, given the precarious state of the government’s finances, little or no change in spending on social sectors such as education, healthcare and rural development cannot be ruled out. While the government’s intention to reduce the deficit is certainly a step in the right direction, one will have to wait and see how it all pans out.

Hindalco strong on higher metal prices
01:30 pm

Although trading well above the dotted line, the Indian markets witnessed some volatility during the previous two hours of trade. Currently, buying activity is being witnessed across all sectors with stocks from metal, consumer durables, auto and capital goods sectors leading the pack of gainers. IT stocks, however, are currently seeing some pressure as the BSE-IT Index is trading marginally lower.

The BSE-Sensex and the NSE-Nifty are currently trading higher by around 180 points (up 1.1%) and 55 points (up 1.1%) respectively. Stocks from the midcap and small cap spaces are also trading in the green, with the BSE-Midcap and the BSE-Smallcap indices trading higher by 1% each. The rupee is trading at 46.03 to the US dollar.

Metal stocks are in demand today with Hindalco, Tata Steel and JSW Steel leading the pack of gainers. Trading higher by about 5.5%, the stock of Hindalco was the top amongst stocks forming part of the BSE Sensex Index at the time of writing. In fact, almost all the metal stocks are currently trading in the green. Gains in these stocks are on the back of a rise in metal prices on the London Metal Exchange (LME) yesterday. It is reported that a gauge of six metals jumped by about 4.2%. While aluminium prices are flat today, yesterday they were higher by about 4% as well. Gains in Hindalco are also seen on reports that the company is hoping to complete raising Rs 49 bn of debt within the next two weeks to achieve financial closure for its Utkal Alumina refinery. This refinery will have a capacity of about 1.5 m tonnes per annum and is located in Orissa.

It must be noted that the stock of Hindalco has ended in the green during the past four days. While higher aluminium prices are one reason, investors have also been favouring this stock on the back of the optimism that the government will boost infra spending, leading to spur in demand, in its annual budget next week.

Auto stocks are currently trading firm led by Eicher Motors, Bajaj Auto, M&M and Maruti Suzuki. A leading business daily has reported that Tata Motors is looking to venture into manufacturing bullet proof combat vehicles for the defence sector. The company will manufacture light bullet proof vehicles for the Indian army. For the same, it is expecting a possible order of about Rs 3.5 bn. In addition, the company also launched an anti-mine vehicle that will be used by the Indian Army, paramilitary and police forces. It may be noted that the company’s peer group M&M and Ashok Leyland also have a presence in this business.

In another development, the company recently announced that it has cut down production of its commercial vehicles by about 5% to 10% due to a shortage of certain key components such like radial tyres. This issue is however not limited to Tata Motors. Ashok Leyland is also believed to have cut down production due to the same reason. The reason cited for this shortfall is that of the auto component suppliers not being able to match up the expansion that the OEMs have done. However, Tata Motors expects the scenario to improve within a few weeks as it is working with its suppliers to resolve this issue. In addition, the management of the auto firm is also planning to hike prices of its CVs by about 1% to 2%. This is to offset the cost of new diesel engine technology that will be introduced in order to meet the new emission standards effective from April.

All round buying aids indices
11:30 am

The Indian markets continued to trade on a strong note during the previous two hours of trade. Currently, buying activity is being witnessed across all sectors with stocks from metal, consumer durables, auto and capital goods sectors leading the pack of gainers.

The BSE-Sensex and the NSE-Nifty are currently trading higher by around 226 points and 66 points respectively. Stocks from the midcap and small cap spaces are also trading in the green, with the BSE-Midcap and the BSE-Smallcap indices trading higher by 1.3% each. The rupee is trading at 45.98 to the US dollar.

According to a leading business daily, India's largest private sector power utility, Tata Power has signed an MoU (Memorandum of Understanding) with a large Korean utility company for identifying and executing opportunities in Asia, West Asia and Africa. This MoU signed with Korea's East West Power Company (EWP) will focus towards initiating technical cooperation for finding operations and maintenance opportunities relating to third party generation assets.

It may be noted that Tata Power has an installed generation capacity of around 3000 MW, with a widespread presence in all the segments of power sector. This includes power generation (thermal, hydro, solar and wind), transmission, distribution and trading. We believe that this association will aid the company in expanding its operation and maintenance portfolio in India, Korea and other target markets.

As per a leading business daily, L&T is planning to invest around Rs 1.84 bn for expanding its ship-building capacity, particularly for the defense sector, by mid-2011. It may be noted that the company already has a ship-building yard at Hazira. However, due to some limitations, it cannot manufacture large ships there.

The company is setting up a new ship-building facility near Ennore port for producing large ships and submarines for the Indian Navy. It will use its land bank of around 1,200 acres near Chennai for building this facility. It may be worth noting that earlier, Indian government rejected company's joint venture with a Franco-German aerospace and defense group, EADS for providing services to the Indian defense sector. The company is in talks with the government for resolving the issue. We believe that by building adequate capacity the company will be able to leverage government's increased budgetary allocation for the defense sector.

Metals add shine to the markets
09:30 am

Led by strong buying in metal stocks, as also on the back of positive global cues, Indian markets have opened today on a positive note. Gains are also seen in stocks from the realty, capital goods, and auto sectors. As for the broader markets, there are almost four gainers for every stock that is down currently on the BSE.

The BSE Sensex and NSE Nifty are currently trading with gains of around 170 points (1.1%) and 55 points (1.1%) respectively. Mid and small cap stocks are also trading in the positive. The BSE Midcap and BSE Smallcap indices are up by 0.9% apiece. The rupee is trading at 45.95 against the US dollar. Most Asian markets are also trading in the positive. Key gainers include China (up 1.1%), Hong Kong (1.9%), and Japan (2%). The US markets closed yesterday 1.7% up, led by improved economic reports and better results from some blue chip companies.

Coming back to the Indian markets, metal stocks are leading at the start of trade today. Key gainers here include Tata Steel, JSW Steel, and Hindalco. Tata Steel, India's largest and the world's fifth largest steelmaker yesterday announced its consolidated results (including Corus) for the December 2009 quarter. The company reported a 42% YoY decline in net profits during the quarter. This came on the back of a 21% YoY decline in sales and higher tax expenses. Otherwise, its operating profits grew by 2% YoY led by an improvement in operating margins to 11.3% (from 8.7% in 3QFY09). The rise in operating margins was led by higher volume sales of steel as also higher realisations. The company continues to suffer because of recession in the European market. This is even as the developing world of China and India are seeing robust demand due to investments in infrastructure and automobile sectors. What else would explain the 49% YoY growth in volumes that the company had recently reported for its Indian operations as part of its standalone performance reporting?

After ending as the top loser among heavyweights for two consecutive days, Bharti Airtel is back in the positive today. Statements made by the company's Chairman with respect to the long-term benefits that the Zain Africa (Zain) deal provides are the likely reasons for the same. Mr. Sunil Mittal has also indicated that the company is looking to seal the deal by 25th March, given that it is currently doing the last round of due diligence of Zain's books. While he has not clarified as to the ways of funding the deal, the total payout from Bharti is expected to be around US$ 9 bn. The earlier figure of US$ 10.7 bn included a net debt of US$ 1.7 bn that is there on Zain's balance sheet.

We are of the belief that it is too early to draw any conclusions on whether this deal is valuable or not for Bharti. What we however know is that African telecom market has a high growth potential, given that less than 50% of the population have mobile phones. Also by expanding its business outside the country, Bharti will have the economies of scale to get more cost-efficient. It is also important to remember that the company's aggressiveness in moving to international markets is coming at a time when the Indian mobile service market is facing fierce competition. Given this, it is natural for the company to look beyond the Indian shores. And what better option can there be than Africa, a region that shares several of India's characteristics that have brought success to Indian telecom companies - low incomes and affordable tariffs, and a large rural population.

India Inc has its debt woes too
Pre-Open

There is plenty of newsprint being devoted to the debt problems of Greece these days. Probably more than what the Dubai and US fiscal problems ever 'enjoyed'. But what deserves more attention of Indian investors is the debt problem being faced by India Inc.

Indian companies that embarked on ambitious plans for expansion and acquisition during the heady days of 2006-07, did so on the back of leverage. The smarter ones raised foreign currency denominated debt that was convertible into equity at later dates. In financial terms, these are termed as foreign currency convertible bonds or FCCBs. FCCBs are essentially a type of convertible bond issued in a foreign currency. Bond holders get paid interest in foreign currency and also have the option to eventually convert them into equity. The conversion price is fixed when the bond is issued.

Being a hybrid instrument, the coupon rates on FCCBs are typically lower than pure debt or zero, thereby reducing the debt-financing costs. FCCBs are also book value accretive on conversion. More importantly, they save the risk of immediate equity dilution as in the case of public issues.

Banking on these positives, Indian companies raised US$ 23 bn worth of FCCBs between 1997 to 2008 (as per Bloomberg). In 2010 alone, US$ 2.8 bn worth of FCCBs are due for redemption or conversion into equity shares. However, the tempered sentiments in the stock markets have dealt a blow to the steep valuations of the FCCB issuing companies.

Incidentally, the current stock prices of the issuers are a fraction of their FCCB conversion prices. During the bull run, FCCBs were typically priced at a premium of 30% to 70% over the stock price. Since then, financial performance has slipped and share prices have readjusted to the valuations for lower growth outlook in the wake of economic slump. The companies now run the risk of having to pay for the redemption of the FCCBs despite inadequate cash flows.

But as in most other cases, the government is once again at its job of bailing out ambitiously leveraged firms. It has allowed companies to reprice their FCCBs. Companies are allowed to negotiate with investors if their scrips are trading below the conversion price. The negotiation can be based by pricing the FCCBs at their two-week average stock prices.

We believe that here again the government is setting the wrong example by letting companies get away with their disastrous capital planning. While the bailout may certainly be of temporary interest to the shareholders, the chances of such mistakes being repeated only multiply.