Jittery before the Budget
Closing

Strong bout of selling activity led to the markets giving up most of their gains during the closing hours of trade and end the day only marginally higher. While Sensex edged higher by around 45 points (up 0.3%), Nifty gained around 10 points (up 0.2%). However, BSE Midcap and Smallcap indices closed weak today, losing 0.6% and 1% respectively. Advance to decline ratio remained pretty even today with gainers and losers in the Sensex split rather evenly.

Most Asian stocks ended higher today whereas Europe has opened mostly weak. The rupee was trading at Rs 46.2 to the US dollar at the time of writing.

What started with a bang ended with a whimper today. The markets opened quite strong but by the time the closing bell was sounded, they had given up virtually all their gains. In other words, some investors used the rally to make themselves lighter and this put a dampener on any chances the markets had of ending on a buoyant note.

The strength in the morning could be attributed to global cues ahead of the Bernanke's testimony before the US Congress where he is expected to maintain the status quo on interest rates. This effectively means cheap money would be there for the taking and recovery efforts would continue. Also, crude oil witnessed a spike in its price, further strengthening the recovery theory. However, investors in Indian equities also had to put the upcoming budget into the equation and hence, the resistance could have been borne out of the fact that the government is considering rollback of some stimulus measures. All in all, the markets are likely to remain tepid till the time the budget is announced.

One sector that has benefitted immensely from the government stimulus measures is auto. Hence, it is only obvious that the auto makers want the stimulus party to continue as long as possible. After a couple of other automakers, it is now the turn of India's largest passenger car manufacturer Maruti Suzuki to appeal to the Government to start withdrawing the stimulus but only at a measured pace. The company's management is of the belief that if the entire stimulus is withdrawn at once, it may lead to a sub-par economic growth.

The domestic auto industry has grown at one of the fastest pace in recent times in the past few months and a good deal of credit for the same could be given to the excise duty cut initiated by the government as a part of stimulus program. But now, with the economy having recovered substantially and the government staring at a huge fiscal deficit, there is indeed a strong case for the rollback of stimulus measures. Given the things at stake, it looks most likely that the Finance Minister would choose the middle path i.e., undertake stimulus withdrawal at a measured pace. Auto stocks closed mixed today with gainers being Hero Honda and Maruti while TVS Motor and Ashok Leyland closed lower today.

Mkts continue to trade firm
01:30 pm

The Indian markets have managed to firmly hold on to all of their gains from the morning session during the previous two hours of trade. Stocks across sectors, as indicated by their respective sectoral indices, are seeing gains with those from the metal, IT, and telecom spaces leading the pack of gainers. Stocks from the healthcare and power spaces are amongst the lower gainers at present.

The BSE-Sensex and the NSE-Nifty are trading higher, up by around 180 points (1.2%) and 50 points (1.2%) respectively. The BSE-Midcap and BSE-Smallcap are also trading firm, up by around 0.6% and 0.3% respectively. The rupee is trading at 46.13 to the dollar.

A leading business daily has reported that auto major, Mahindra and Mahindra (M&M) is looking at aggressively expanding its second hand car business, which runs under the banner of Mahindra FirstChoice (MFC). As per MFC's management, it has set a target of selling nearly 100,000 vehicles by the year 2015. This target is way higher than the actual numbers of about 10,200 pre-owned cars that it sold in FY09. MFC is looking at selling nearly 18,000 odd units during the current fiscal and is expecting to double the same during the next fiscal.

The company plans on achieving its target by a gradual ramp up in outlets. At present, it is believed to have about 114 outlets. The target set for 2015 is 500 outlets. As per the company, nearly 1.4 m pre-owned cars were sold last year. This takes MFC's market share to levels of about a miniscule 0.7%. However, if the company's strategy goes as planned, it is expecting to enjoy as market share of about less than 5% by 2015. While it definitely is an aggressive target, it must be noted that there are very few organised pre-owned cars sellers in India, which does give companies such as MFC a certain edge. Auto stocks are trading mixed with the stock of M&M trading lower currently.

Nestle announced its 4QCY09 and CY09 results over the weekend. The company's top line for the quarter grew by 24.2% YoY. The growth came on the back of strong domestic sales. Operating (EBITDA) margins disappointed as they fell by 4.5% and consequently stood at 14.7% of sales. Its net profit fell by 6.7% YoY during the quarter on the back of lower operating income and lower other income, partially offset by a fall in tax expense. Net profit for the full year CY09 improved by 22.6% YoY while net profit margins improved by 0.4% to stand at 12.7%. This performance was aided by strong operating income growth and fall in effective tax rate during the full year. While the company has shown a robust top line growth during the quarter, the increase in raw material costs depressed margins and bottom line. Further, due to rising food prices resulting in demand destruction, the company has to advertise more heavily to maintain top line growth. Going forward the key to further growth will be how effectively the company is able to pass on the rise in raw material costs. The stock of Nestle is currently trading lower.

Metal, IT stocks keep markets firm
11:30 am

The Indian markets continued to see some traction as buying persisted during the previous two hours of trade. The market sentiment is optimistic currently as the overall advance to decline ratio is poised at 1.8 to 1 on the BSE. Stocks across sectors have managed to garner investors' interest, with those from the metal, IT, and banking spaces leading the pack of gainers. Stocks from the healthcare and FMCG spaces are amongst the lower gainers at present.

The BSE-Sensex and the NSE-Nifty are trading higher, up by around 190 points (1.2%) and 55 points (1.2%) respectively. The BSE-Midcap and BSE-Smallcap are also trading firm, up by around 0.7% each. The rupee is trading at 46.16 to the dollar.

Telecom stocks are currently trading firm led by Bharti Airtel, MTNL and Reliance Communications. Telecom major, Bharti Airtel is believed to have lined up funds to the tune of US$ 9 bn for the proposed acquisition of Zain Telecom's African assets. It must be noted that there is however no official statement from the company. It is believed that the company will take on this debt in the form of long-term loans, of which a major portion will be from foreign banks. A key reason for the company planning to fund this acquisition through debt is on the back of its balance sheet being under-leveraged at present.

This does indicate that the management has not opted for capital raising through the equity route. This could be on the back of the investing community indicating that it is not in favour of this deal as Bharti's stock dropped sharply during the previous week. It may be noted that the senior management of the company recently gave its views on the reaction that the stock received once the company announced its buyout plan. Mr. Sunil Mittal, Chairman of Bharti recently spoke to a business daily stating that Zain is a better fit for the company (as against MTN). This is mainly due to the fact that Bharti would get control over Zain's operations as opposed to the deal that was being signed with MTN wherein there would be a partnership between the two companies.

As per a leading business daily, BHEL is planning to sign a technology transfer agreement with European company Sheffield Forgemasters this week. This will give BHEL access to Sheffield Forgemasters' technology which will help it upgrade its manufacturing of castings and forgings at its Hariwar plant. In effect, it will enable BHEL to manufacture new and improved castings and forgings. Consequently, it will help BHEL consolidate and improve on its core prowess of building quality power equipment, as castings and forgings are key components in power equipment. Further, the company is planning to invest Rs 6 to Rs 8 bn in this venture. Engineering stocks are currently trading firm led by Alfa Laval, Punj Lloyd and ABB.

Strong start to the week
09:30 am

The Indian markets have started today's session on an extremely positive note. The benchmark indices opened way above the breakeven mark and have marched further upwards since then. Other key Asian markets are trading in the green with Japan (up 3.2%) leading the pack of gainers. The US markets closed higher by 0.1% last Friday.

Currently in India, heavyweights from the BSE-Sensex are trading strong with metal and auto stocks attracting investors' interest. The BSE-Sensex is trading higher by around 220 points, while the NSE-Nifty is up by about 60 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% and 1.1% respectively. The rupee is trading at 46.26 to the US dollar.

Cement stocks have opened the day on a strong note. Gainers here include JK Lakshmi Cement and Dalmia Cement. As per a leading business daily, India's third largest cement maker Ambuja Cements plans to expand its capacity to 24 m tonnes (MT) from the current 19 MT by year-end. The expansion will require investments of around Rs 35 bn. The company also plans to add grinding capacities in two of its existing plants. Overall, the company will invest around Rs 47 bn, which will be funded through a mix of internal accruals and debt. Swiss-based Holcim holds a 46% control in Ambuja Cements. It has a strong presence in the western and northern regions of India. In our view, the capacity expansion at most cement companies reflects the strong demand from the infrastructure sector. Housing activity and the upcoming Commonwealth Games are also demand drivers. In fact, cement prices have increased by Rs 15 per 50 kg bag in the North and Rs 5 per bag in the West since January this year.

Banking stocks have opened the day on a positive note. Gainers here include Bank of Baroda and Canara Bank. As per a leading business daily, India's second largest public sector bank Punjab National Bank (PNB) has set a target of achieving business of Rs 10 trillion by FY13, up from the Rs 4 trillion it did in the calendar year 2009. In order to achieve this ambitious target, the bank plans to expand its customer base from the current 46 m to 150 m by FY13. Much of this expansion will be driven by information technology. PNB has 4,894 branches currently. It may be noted that, traditionally the bank has a strong presence in rural and semi urban areas. As a result, it has maintained one of the highest proportions of low cost current and savings account deposits among the public sector banks.

Expecting a 'big bang' Budget?
Pre-Open

The past few weeks have been volatile for the Indian markets. After scaling the highs of almost 18,000 in early January, the Sensex has fallen by around 9%. Current concerns are more global in nature. With European economies falling apart and the US situation becoming grim, global markets are staring at uncertain times in the short to medium term. And in being largely dependent on foreign inflows, Indian markets are dutifully toeing whatever's happening to global markets.

Of course, there is no dearth of concerns domestically as well. Rising inflation and interest rates pose the biggest risks for the Indian economy currently. And there are no real expectations from the upcoming budget as well. In fact we might see a partial rollback of the stimulus measures starting this budget. And that's most likely going to make the markets even more nervous.

With the Indian economy seen on a path to recovery, any measure towards partially withdrawing the stimulus must not come as a surprise. This is also given the strained balance sheet of the Indian government. With fiscal deficit staring at the 7% mark, there is no other way for the government to fulfill its spending program than to raise taxes. Therefore, taxpayers must not have many expectations from Mr. Pranab Mukherjee.

As for investors, a disappointing budget can serve as a good omen! This is because good quality stocks, which have become expensive after last year's bull-run, can again provide some value if they fall. As the Finance Minister had said last year - "A single Budget speech cannot solve all our problems nor is the Union Budget the only instrument to do so."

So it will be good for investors to lower their expectations from the budget. Investing carefully and with discipline will rather serve their purpose better.